9 November 2005 Sector Report

Aslı Sipahi [email protected] +90 (212) 317 69 34 Turkish Banks WHO HAS IT? Sertan Kargın [email protected] +90 (212) 317 69 37 Banks Ali K. Akkoyunlu [email protected] The Turkish banking sector has completed its initial +90 (212) 317 69 33 transition phase, but there is more to come The Turkish banking system has undergone a phase of structural evolution since the financial turmoil of 2001. The introduction of a comprehensive series of measures for the restructuring and rehabilitation of the banking system has triggered a consolidation process through mergers, takeovers and co-operation agreements, improving allocative efficiency in the financial system.

Free equity, deposit franchise, and spreads on TRY business are key value drivers The opening of negotiations with the EU, the introduction of the mortgage system and new tax scheme on savings instruments in 2006, along with growth of free equity, widening deposit base at optimal spreads and improving cost efficiency are set to be the growth catalysts of the Turkish banking sector. The widening deposit base, together with an ongoing spread compression process, will provide better grounds for higher banking franchises, and in turn sustainable profitability in the core banking business. Meanwhile, private commercial banks’ attempts to increase their fee & commission income appear not to secure sustainable profitability in core banking business, providing a limited contribution to bank franchise values.

In our view, a meaningful Turkish Banking franchise must have an optimal NIM of 6.0-8.25% This estimate is based on duration-adjusted cash flow stream on spreads, and can be maintained with a large free capital base and strong market share. Based on these estimates, Akbank, Is, and TEB have the requisite structural dynamics.

Akbank, Isbank and TEB (all Strong Buy) are our top picks in the sector, as all three contemplate strategic business initiatives consistent with the features of the new banking landscape. TEB is maintaining its healthier growth process, whilst sticking to low-cost banking management that provides a higher upside potential compared with its peers, Finansbank and Denizbank. Akbank and Isbank have the best margin mix and wider deposit base among the large-scale banks, strengthening their franchise values. Currently, Garanti is more focused on high-margin TL assets with its strong positioning in SME and retail loans. We believe that with its partnership with GE, the bank could potentially boost its banking franchise and in turn achieve higher core banking profitability.

Share Target P/BV ROAE TRY Price Rating Price Upside 2005E 2006E 2007E 2005E 2006E 2007E Akbank 9.2 Strong Buy 11.4 24% 2.7 2.3 2.1 24.3 27.4 27.9 Isbank 10.0 Strong Buy 12.1 21% 2.2 1.8 1.6 13.6 16.1 18.1 Garantibank 4.2 Outperform 4.9 18% 2.4 2.0 1.7 21.0 24.0 23.0 Finansbank 4.7 Neutral 5.2 10% 3.3 2.7 2.2 30.5 31.9 30.4 TEB 17.7 Strong Buy 23.4 32% 2.2 1.9 1.6 20.0 19.5 19.3 Denizbank 8.0 Outperform 9.0 13% 2.4 2.1 1.9 21.3 24.8 27.3 Average 2.6 2.1 1.8 21.8 24.0 24.3

Turkish Banks, 9 November 2005

SUMMARY AND INVESTMENT CONCLUSION

We are initiating our coverage of the Turkish banking sector with an Overweight recommendation. As presented in this report, despite the strong performances of the bank stocks over the past year (89%), we believe there remains substantial value to be created with some potential upgrades underway in 2006. In our base case scenario, Turkey’s dual anchors, together with its structural reform program, will likely pave the way for further and sustained economic and political reform, providing a major boost to Turkey’s non-inflationary economic expansion. Strengthening recovery in Turkey’s economic and institutional fundamentals, together with lower financial intermediation costs, will improve the allocative functions of the financial system.

The Turkish banking sector has completed its initial transition phase, but there is more to come. The sector is about to complete its initial consolidation phase, with new foreign banks expected to enter the market to compete for a slice of the pie in the next couple of years. Thus, the sector appears to be maintaining its growth path for the foreseeable future, while competition is becoming more intense than ever, due to technological advances, sophistication of customer needs, new entrants and industry deregulation. Not only will the competition enhance the quality of banking services, but also operating efficiency in the sector will approximate global standards. There are still many small, medium-sized and large banks that have yet to identify a firm position in the sector. These smaller banks will have a more difficult time maintaining their current positions in terms of revenue, profits and overall market share. They will initiate the search for mergers, while medium- sized banks will seek better ways to grow. This reality translates into the fact that size and scale will become crucial strategies for the future prospects of the Turkish banking sector.

We believe that in an improved banking business environment, Akbank, Isbank and TEB are clearly the main beneficiaries of macro stability.

Akbank (Strong Buy) and Isbank (Strong Buy) are well positioned with their best business mix. We strongly recommend Akbank as a pure banking play, since it is well positioned with core interest revenues making up 53% of its margin mix, and it also comfortably covers its operating expenses with core banking revenues. Isbank has the best margin mix among the large scale banks, while its strong performance in achieving healthier NIMs and its decision to deploy more capital to its core banking business (representing the revenue earned from the loans given to the “non-financial private sector”) seems to strengthen its franchise value for the foreseeable future.

Garanti (Outperform) will move into an inorganic asset growth trajectory in the near future with the GE deal. Garanti currently seems more advantageous in terms of high yielding margin mix in the lucrative TL lending segments – such as retail and SME loans - compared to its peers (Akbank and Is Bank). However, the bank has still some difficulties in penetrating TL time deposits due to its less aggressive pricing strategies. With its partnership with GE, it could have the opportunity to register strong upsides in the near future.

TEB (Strong Buy) is growing at a sustainable pace, and its shares offer an attractive combination of value and growth. What differentiates TEB from its peers, Finansbank and Denizbank is its sustainable asset growth trajectory and conservative stance on the cost management front. With the current balance sheet structure and growth strategy in core banking business, the bank is using the right policies, consistent with the arithmetic of the Turkish banking industry. In our view, although TEB shares have shown a strong performance they are trading below their fair value and at a discount when compared with Finansbank and Denizbank.

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Denizbank (Outperform) has so far improved its business mix very successfully, with core banking revenues reaching 60% of total banking revenues. The Bank has also achieved a respectable TRY market margin. We believe that the current stock price reflects the strength of its franchise. However, we are concerned over whether this aggressive growth strategy could pressure its ability to maintain banking profitability in an environment where diseconomies of scope and high concentration exist.

Finansbank (Neutral) has so far registered an impressive growth performance and created substantial value for its shareholders. Yet the existence of diseconomies of scope and high concentration in the banking sector raise concerns about the sustainability of the bank’s core business profitability. More importantly, we see an inconsistency between the bank’s deposit franchise and its efforts to expand the branch distribution network.

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VALUATION

Our key valuation methodology is based on the Dividend Discount Model (DDM). We prefer to use a DDM & Sum of the Parts (SOTP) Model for Isbank, due to a number of substantial non-core assets, and for Finansbank, Denizbank and TEB, for their cross-border banking operations, which we believe is an important factor in their valuation. Also note that we have used BRSA non- consolidated financials. Our model is based on a 10-year earnings growth (2005-2014) and 60% dividend pay-out ratio for each bank. The cost of equities for each bank varies between 14% and 16%. These comprise 10% of the risk free rate, the beta of each bank, and a 5% of equity risk premium.

Table 1: Dividend Discount Model

TRYmn NPV of NPV of Total (*)Current Upside Dividends Perpetuity Participations NPV Market Cap % Akbank 7,815 12,774 - 20,588 16,560 24 Isbank 8,059 11,671 4,027 23,757 19,689 21 Garantibank 3,753 6,571 - 10,324 8,736 18 Finansbank 1,570 2,580 751 4,901 4,465 10 TEB 434 774 142 1,350 1,023 32 Denizbank 1,014 1,636 195 2,846 2,529 13

Source: YF Research (*) Current value is the value as of 07.11.2005

We also used a comparable analysis so that it provides a cushion for our valuation methodology. The banks under our coverage trade at an average 2.6 and 2.1 P/BV for 2005 and 2006, respectively. Finansbank appears to be trading above the trend line and supports our neutral recommendation. Although Akbank’s P/BV is slightly above average, with a higher ROAE it supports its upside potential. Isbank is currently on a low ROAE, however with the increase in its core assets and increase in its profitability we expect it to increase its ROAE and decrease its P/E ratio.

Table 2: Comparable Valuation (2005-2007E)

P/E P/BV ROAE 2005 2006 2007 2005 2006 2007 2005 2006 2007 Akbank 11.1 9.2 7.9 2.7 2.3 2.1 24.3 27.4 27.9 Isbank 17.3 12.3 9.4 2.2 1.8 1.6 13.6 16.1 18.1 Garantibank 11.8 8.1 6.9 2.4 2.0 1.7 21.0 24.0 23.0 Finansbank 12.3 9.3 8.0 3.3 2.7 2.2 30.5 31.9 30.4 TEB 12.0 10.4 9.0 2.2 1.9 1.6 20.0 19.5 19.3 Denizbank 12.5 9.1 7.2 2.4 2.1 1.9 21.3 24.8 27.3 Average 12.8 9.7 8.0 2.6 2.1 1.8 21.8 24.0 24.3

Source: YF Research

3.0 Finansbank Finansbank 2.2 2.5 Akbank Akbank Denizbank Denizbank 1.7 Isbank Garanti 2.0 Isbank 2007E P/BV2007E 2006E P/BV 2006E TEB Garanti TEB

1.5 1.2 15.0 20.0 25.0 30.0 16.0 21.0 26.0 31.0

2006E ROAE 2007E ROAE

Source: Company data, YF Research Source: Company data, YF Research

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INDUSTRIAL ORGANIZATION OF TURKISH BANKING

Features of the ‘New’ Banking Landscape

The Turkish banking system has undergone a phase of structural evolution, since the financial turmoil of 2001. Over the past four years, the rehabilitation of the state banks, the restructuring of banks taken over by the Savings Deposit and Insurance Fund, privatization efforts, and establishment and execution of an independent regulatory framework have so far provided better grounds for competition and transparency of the banking sector. Coupled with the introduction of new standards in line with International Accounting Standards, and a recapitalization process in 2002, amendments to the legislative framework have improved the banking sector’s loss absorption capacity. This has helped provide a strong buffer cushioning bank balance sheets from potential exogenous shocks, and in turn minimized the likelihood of systemic risks. Comprehensive restructuring and rehabilitation efforts triggered a consolidation process through mergers, takeovers and co-operation agreements, which led to the elimination of inefficient banks from the system.

Large private banks dominate the sector. The number of banks in the system declined from 79 in 2000 to 47 in 2005, while rehabilitation of the state banks let the concentration ratio in the banking system rise significantly. The market share of public banks has declined to 20% from 34% in loans and to 40% from 59% in deposits over the past four years. The share of the largest four banks in total assets reached almost 43% in H1 05, as opposed to 28% at year-end 2000. This was a by- product of the normalization phase in the financial system, as in the post-crisis period, the large- sized commercial banks have the capability to leverage their distribution channels and improve service quality to enhance customer base (flight to quality).

Due to Turkey’s macroeconomic normalization, together with EU convergence, financial services in the sector have so far undergone a profound era of change. The Turkish Banking Sector has become an integrated provider of a range of new products and services. Given the lower loan penetration levels versus the European average of 72% (for instance 101% in Portugal and 66% in Spain), banks’ loan books rose at an annual average rate of 20% in the stabilization period 2002-2004. As a result, loans as a proportion of total assets showed a robust increase, rising to 34% in December 04 (37% as of June 05). Declining real returns and increasing lending prospects have so far allowed banks to shift their investments in securities to loans. Strong loan growth has boosted loan-originated fees, which have become one of the main sources of profit generation. The Turkish banking sector’s net fee & commission income rose by 40% to TRY 3,966m in December 04 from TRY 2,842m in December 02, raising its fee & commission income/opex ratio closer to international standards. On the other hand, banks’ net income grew by 75% in June 05 compared with the same period of last year.

With declining public debt-to-GNP and improving growth prospects, loan availability to the non-financial private sector rose significantly to 53% in June 2005 from an average of 47% between the Russian Crisis of 1998 and the twin Turkish financial crises (TL devaluation and financial sector crisis) experienced in 2001. Loans as a proportion of GDP (a proxy for loan penetration rate) increased to 26% in June 05 from 14.5% in 2002, indicating that the Turkish banking sector still has significant growth potential. However, despite robust growth prospects, the total assets to GDP ratio remained at a lower level of 74% as of June 2005. With low loan/deposit ratios, for the foreseeable future, the Turkish banks should have no difficulty in increasing their loan book faster than their deposit base without disturbing their liquidity ratios.

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Table 3: Three Year Performance of the Turkish Banking Sector

(TRY mn) Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Balance Sheet Loans 72,301 67,305 78,676 91,117 103,241 125,295 Total assets 274,061 246,290 278,686 274,843 306,452 337,244 Deposits 183,391 160,424 177,865 177,445 197,394 213,835

Shareholders’ Equity 33,017 35,079 42,429 35,605 45,963 46,901 Income Statement Net interest income 16,838 5,385 14,363 7,943 17,678 9,270 Net fee and commission income 2,842 1,390 3,019 1,755 3,966 2,382 Net income 3,191 2,820 6,299 2,408 6,456 4,212 Key Ratios (%) NIM 7.4 5.0 5.4 6.8 6.9 6.6 ROAE 9.7 17.2 17.4 13.4 14.6 19.0 NPL Ratio 18.7 16.2 12.3 6.5 6.2 5.6 Source: BAT Data

Local banks have concentrated on efficiency to maintain their leading position among their peers, which sharply increased competitive pressures. Competition revolved around pricing, productivity (per branch and per personnel in terms of assets), loans and deposits. This obliged the banks to undergo radical changes in order to increase operational efficiency, as well as minimize costs. The current banking landscape requires banks to increase the size and quality of their balance sheets, and thus shift to conventional banking activities (especially profitable customer segments).

The Arithmetic of the Turkish Banking Sector – Our Model

Key Value Drivers: Net interest margins, deposit base, franchise value. With interest rates declining to a three-decade low of 15% and inflation falling to a single-digit pace, rationalizing the fiscal burden on the banking sector (such as reserve requirements, indirect taxes, transaction fees) has lowered net interest margins, thus improving financial sector depth. Net interest margins (NIMs) were remarkably high before the 2002-2004 stabilization period. In fact, net interest margins of Turkish banks were twice as large as those in comparable OECD countries before 2002, due to the then prevalent high inflation environment. The disinflation process, together with the government’s attempt to reduce heavy intermediation costs, pushed NIMs down to the single-digit path. “Sustaining NIMs at single digit rates is the key to widening the deposit base and in turn increasing the banks’ franchise values.” At this point, the implementation of the 15% withholding tax on saving instruments appears to have a positive impact on the banking sector, leading to a shift towards deposits. In our view, the new tax regime on financial and capital market gains will allow the deposit banks to widen their deposit base, increasing their franchise values, and more importantly, could help to offset further decline in net interest margins.

Deposit franchise is the key driver of Turkish banks’ value. The value of a bank franchise, which reflects the present value of deposit cash flow, is critical to future profitability, as it allows the bank to maintain NIMs at optimal levels. Accordingly, the franchise value is primarily derived from the deposit base, implying that “Franchise Value” almost equals “Deposit Franchise”. To this end, the franchise value can be calculated by the following formula:

Deposit franchise = Deposit base x NIM – operating cost – tax

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A fundamental problem: The presence of diseconomies of scope in the banking sector. Since operating costs and taxes are exogenous variables, achieving optimal NIMs and enhancing the deposit base are key issues for the prospects of bank franchise values (banking business), and thus future profitability. The formula suggests that the higher the deposit franchise the larger is the deposit base required to sustain NIMs at optimal levels. In the low inflation environment, as NIMs are defined as optimal at single digit rates, a profitable bank franchise (or high deposit franchise) can only be achieved if deposit base growth outpaces loan availability. “In the context of the microeconomics of banking, this suggests that an increase in loan volume should have the consequence of decreasing marginal cost of deposits in order to lay the appropriate environment for sustained profitability of the banking business”. The economic interpretation of this condition is related to the notion of economies of scope, which we analyzed in detail on page 10.

We built our structural model for net interest margins on a different financial concept. Estimation of optimal net interest margins can only ever be approximate, depending on both the period under analysis and period over which cash flows are re-priced. At this point, we used a structural model to approximate optimal levels for net interest margins. Our analysis covers the 2002-1H05 period, as maturity and interest rate sensitive balance sheet items for the whole banking system are not available for the pre-crises period. We built our structural model for net interest margins on a different financial concept, highlighting the impact of market value of cash flow stream on spreads.

Our model specification begins with defining modified duration, or interest rate elasticity. This definition can be stated in the form of the following equation:

IRE = ∆MV/[MVx∆r] = -D / (1+ r) (1) Where IRE= interest rate elasticity D = duration in years of the cash flow stream r = yield to maturity (on interest rate) MV = market value of the cash flow stream

Then, we derive the equation that specifies the change in the market value of equity when interest rates shift. The basic equation for the market value of equity is the difference between market values of assets and liabilities:

MVE = MVA – MVL (2)

∆MVE / ∆r = [∆MVA/∆r] - [∆MVL/∆r] (3)

[∆MVA/∆r] = [−DA x MVA] / (1+r) (4)

Then, we reach our basic equation

[∆MVE] = [−DA x MVA + DL x MVL] x ∆r / (1+r) (6)

Equation 6 describes the change in the market value of equity for a shift in the yield curve.

The derivation of equations pertaining to net interest income requires separate equations for interest

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income and interest expense over the time period analyzed. For interest income, our equation is the following:

Interest Income = [MVA x DA x rA ] + [MVA x (T-DA) x (rA + ∆r)] (7)

Where T is the time period being analyzed (in our study we take T as 1 year). The first set of bracketed terms in equation 7 gives interest income during the initial life of the interest rate sensitive assets, where the yield is fixed at the original interest rate. The set of terms within the second pair of brackets is interest income during the rollover period(s) experienced under a new yield curve.

Interest Expense = [MVL x DL x rL ] + [MVL x (T-DA) x (rL + Dr)] (8) Net Interest Income = Interest Income - Interest Expense (9) Net Interest Margin = Net Interest Income / Average Interest Earning Assets (10)

According to our calculations, on TRY balance sheets, duration gap adjusted-net interest margins narrowed sharply to 7.2% in H105 from 21.6% in 2002. Under current macroeconomic conditions and maturity structure, optimal banking franchise (or sustainable profitability in core banking business) can be achieved, if a local commercial bank operates with a net interest margin (on its TRY balance sheet) in the range of 6.00% to 8.25%. However, unfair competition from state banks and inconsistency between competitive market pressures and scale of the banking sector present key challenges to running at optimal NIMs (on TRY balance sheets). Given these fundamental issues, operating with optimal margins in the TRY business requires “large free capital base and/or higher market power”, as both allow the bank to be more selective in collecting deposits.

Chart 1: Optimal Net Interest Margin Path

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

Q1 02 Q3 02 Q1 03 Q3 03 Q1 04 Q3 04 Q1 05 Q3 05 Q1 06 Q3 06 Q1 07 Q3 07 Source: YF Securities

Banks need to deploy more capital to their core banking businesses in order to secure long- term profitability. Concentration on fee & commission generation contributes to the banks’ franchise values, but does not guarantee a sustainable profitability path. With irrational competitive market pressures, the focus in the Turkish banking sector has so far shifted from interest income generation to conventional banking activities based on fee & commission generation. However, private commercial banks’ attempts to increase their fee & commission income appear not to secure a sustainable profitability in the core banking business, but provide a limited contribution to bank franchise values and some key ratios - such as fee & commission income/opex ratio. As mentioned in preceding paragraphs, achieving above-trend growth in the deposit base and operating

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at optimal NIMs are key elements of a well-functioning banking business environment. Leaving cost reduction and non-interest earnings enhancement initiatives aside, to date, what the banks have done is to deploy more capital to their banking businesses. Coupled with the introduction of efficiency-enhancing measures to reduce the cost-to-income ratio to below 50% and concentration on fee & commission generation, directing the capital to the core banking business has so far allowed banks to improve their franchise values. However, the current outlook for free equity in the banking sector has not yet guaranteed sustainable profitability for the core banking business.

Understanding the Structure of Banking Business Profitability

Achieving sustainable profitability in the banking environment is entirely conditional on the following:

ƒ Spreads on deposits ƒ Banks’ capacity to achieve economies of scope in the loan and deposit market, and ƒ Operating efficiency and feasibility of fiscal costs of the banking sector.

In terms of fiscal costs, the government’s attempts to reduce the intermediation costs of the banking sector, although very encouraging, depend on monetary and fiscal performance. On the efficiency side, the banks have so far reduced their cost/assets and cost/income ratios significantly, becoming comparable in relative terms to the levels reached by their peers in the EU convergence process. To this end, the first two factors become the key to sustainable banking profitability.

Our assessments on how efficiently the banking sector’s profit generation mechanism works begin with building a profit function for the core banking business. In a competitive environment, a bank’s profit is the sum of intermediation margins on loans, net of operating costs and tax.

πTRY B/S = rLL + rMM – rDD – C(D,L) (11)

(TRY B/S: TRY balance sheet)

Where M is the net position of the bank on the interbank market, L is the TRY denominated loan portfolio, D represents TRY denominated deposits and C(D,L) is the operating costs and tax burden on (TRY denominated) loans and deposits. Thus, rLL + rMM reflects the bank’s interest income on loans and net monetary position (at the interbank), whilst rDD shows the bank’s interest expense on deposits. At this point, we can replace rLL + rMM and rDD with the following equations; equation (12) and equation (13), respectively.

Equation (12)

Interest incomeLoans & Monetary Position = [(MVL,t=0+MVM,t=0) x DW.Av.for L&M, t=0 x r W.Av.on L&M, t=0 ]

+ [(MVL,t=0+MVM,t=0) x (T- x DW.Av.for L-M, t=0) x (r W.Av.on L&M, t=0 + ∆r)]

Equation (13)

Interest expense Deposits = [MVD,t=0 x DW.Av.for deposits, t=0 x r W.Av.on deposits, t=0] +

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[MVD,t=0 x (T- DW.Av.for deposits, t=0) x (r W.Av.on deposits, t=0 + ∆r)]

Where MV means market value, DW.Av.f , t=0 is weighted average duration at initial (t=0), r W.Av.on L&M,t=0 is weighted average interest rate at initial (t=0) and T is the time period being analyzed. As a result,

πTRY B/S = Interest incomeLoans & Monetary Position – Interest expense Deposits – C(D,L) (14)

The formula suggests that the higher the πTRY B/S the larger is the intermediation margin at a given cost and tax base. In the low inflation environment, as the intermediation margins are defined as optimal at single digit rates, sustained profitability can only be achieved if an increase in volume of loans results in decreasing marginal cost of deposits, namely the so-

called “economies of scope”. πTRY B/S is positive, and sustainable banking business profitability becomes achievable if economies of scope exist. This implies that a multinational or large scale local bank can jointly offer loans and deposits efficiently. In the event of

diseconomies of scope, πTRY B/S < 0, banking business environment is unable to secure sustainable profitability.

Our structural model for profits on core banking business suggests diseconomies of scope in the banking sector (Chart 2) We herein exclude the banks’ ability to generate fee & commission income in order not to lead to multi-co linearity in our structural model given the strong relationship between “loan growth and fees & commission income” ~ the higher the loan growth the larger the fee & commission income.

The Chart explains why multinational banks have so far preferred to concentrate on small- size core banking business activities and shown a more conservative stance on cost-to-

income ratios. If πTRY B/S < 0, then narrow banking becomes more efficient in offering core banking services. More importantly, in the event of diseconomies of scope, intermediation margins are adversely affected if substitutes for banking products appear on financial markets (for instance when firms issue securities on financial markets as a substitute for bank loans). The only way to maintain long-term profitability in core banking business and in turn to improve the bank franchise value is to strengthen market power, which requires the bank to direct more capital to its core business. If diseconomies of scope exist, the greater the market power of the bank in deposits, the larger the intermediation margin.

Chart 2: Core Banking Business Profit1 (mn TRY)

0 2002 2003 2004 2005 -1000

-2000

-3000

-4000

-5000

-6000 Core Banking Profit -7000 Fee&commission income and non-cash loans were excluded -8000

Source : YF Securities Estimates

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Coverage Comparisons

Akbank is a pure banking play, Isbank is looking for organic growth opportunities by disposing its non-core assets, TEB is growing at a sustainable pace, and Garanti is set to move into an inorganic asset growth trajectory in the near future with GE deal. Akbank is one of three largest private banks in the Turkish Banking Sector with total assets of TRY 45b at the end of June 05, and it ranks first in terms of asset growth and profitability. Its strong asset growth is attributable to its robust capital structure and solid deposit base that allows the bank to raise domestic funds at lower costs than what its peers do. In addition, Akbank is also well positioned with core interest revenues making up for 53% of its margin mix, while the bank comfortably covers its operating expenses with its core banking revenues as well. All these factors allow Akbank to achieve an ongoing upward trend in asset growth, and thus market share. Isbank, the largest and oldest private bank, has been increasing its asset size at a faster pace since the beginning of 2004, although it has a huge portfolio of industrial assets concentrated mainly on glass and telecommunications sectors. At this point, the bank’s decision to deploy more capital to its core banking business appears to open the way for solid asset growth in the foreseeable future. Garanti’s asset growth has so far lagged behind its peers’ growth performance. However, following the acquisition of half of the controlling shares of Garanti by GE Consumer Finance, it may move into an inorganic asset growth trajectory, not only in Turkey, but also in the region (Eastern Europe, Middle East, Turkish Republics). Finansbank and Denizbank have so far shown similar asset growth paths, increasing their asset sizes by 60% and 41% since 2003, respectively. However, in our view, aggressive growth policy seems inconsistent with the current banking business environment, wherein the large banks get the biggest market shares, and the system is still far from securing sustainable core banking business profitability. To this end, we do not support these two banks’ asset growth strategy since diseconomies of scope and high concentration rate exist. TEB in this context is growing more gradually and conservatively, which we like. We therefore believe that TEB’s asset growth trajectory appears sustainable when compared with its peers’ growth strategies.

Chart 3: Asset Growth (%)

45 42 45 32 35 35 28 29 30 25 21 21 24 25 16 14 15 9 10 10 4 3 5 -5 Akbank Isbank Garantibank Finansbank TEB Denizbank 2004 1H05 2005E 1H05 Sector Average Source: Company data, YF Research, BAT data

We expect the loans growth path to continue in 2006. With falling interest rates and increasing stability in the economy, banks have been successfully increasing their lending exposure. And with the higher returns received from loans compared with marketable securities, the ratio of marketable securities in total assets is falling. Also, the return in TRY business is higher compared with FX that increases the share of TRY loans and deposits. The banks’ attempts to increase the size of the TRY denominated loan book of course contribute to their core business revenues, but they remain weak in securing sustainable core banking profitability. Together with stabilization in financial markets,

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banks’ sale of mortgages, leasing products and consumer loans has been growing at higher rates since the beginning of 2004 on the back of under-penetration, improved consumer confidence and the interest rate compression process. Although, competition in large corporate lending has already eroded spreads on corporate loans, growth in SME and consumer lending still helps maintain satisfactory spread levels.

In a rapidly growing lending environment, TEB, Akbank and Isbank have so far accelerated their loan growth in 2005, while Finansbank faced momentum losses. After its massive growth in loans in 2004, Finansbank had to step on the breaks, and yet despite the slow down we believe it bears a higher risk in rising NPLs than the sector average. Although Garanti has not grown aggressively, it still has an important market share, and we expect the bank to gain momentum in its lending performance within the next two years after its partnership with GE Capital. Although Denizbank has slowed down in the first half of 2005, the bank realized the highest loan growth and we expect the same result to be in effect for the year end.

Chart 4: Loan Growth (%)

71 73 72 70 56 56 60 52 45 50 40 34 37 35 40 30 32 31 27 26 30 24 19 20 10 Akbank Isbank Garantibank Finansbank TEB Denizbank

2004 1H05 2005E 1H05 Sector Average Source: Company data, YF Research, BAT data

As inflation slows down, retail banking speeds up. The Banks see great potential and have already started to emphasize the SME and retail segment. Below we see the share of these loans (including credit cards) rising among overall loan portfolios.

Chart 5: % of SME and Retail Loans

82 85 80 74 70 71 65 66 65 62 61 62 61 54

45 Akbank Isbank Garantibank Finansbank TEB Denizbank 1H05 2005E

Source: Company data

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The NPLs are well-contained. Despite strong loan growth, NPL ratios have not increased significantly, though part of it came through the Istanbul Approach under which some USD 5.5b has been restructured. The rise in NPLs has mainly been from high credit card loan growth, however banks are now focusing more on lending to consumers and SME’s, and hence the share of NPLs is expected to fall. Although improving, Isbank still has an NPL ratio above the sector average of 5.6%, of which 100% is covered. The ratio had substantially risen after the 2001 crisis although we expect a material decline thanks to the recovery of firms that started repaying their debt. TEB’s NPL ratio is significantly below the sector average as a result of its prudent approach. There has been no branch authorization in terms of loan sales, which has curbed uncontrollable loan growth, and hence the amount of NPLs. However, the Bank intends to grow in the retail market, for which it will have to increase the sales network and eventually NPLs by as much as to c2%.

Chart 6: NPL Ratio (%)

8.3 8.0 7.0 5.9 6.0 5.0 4.6 4.5 5.0 4.0 4.2 3.6 4.0 3.0 2.5 2.5 3.0 1.9 2.1 1.6 1.7 1.5 2.0 1.3 1.1 1.0 0.0 Akbank Isbank Garantibank Finansbank TEB Denizbank 2004 1H05 2005E 1H05 Sector Average

Source: Company data, YF Research, BAT data

Chart 7: Net Interest Margin (NIM)

16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2002 2003 2004 1Q05 1H05 2005E

Akbank Isbank Garantibank Finansbank TEB Denizbank

Source: Company data, YF Research

As mentioned in the preceding pages, NIMs have now come to our estimated optimal range of 6.0% to 8.25%, which is the key to achieving profitable bank franchise values. In our view, despite the ongoing spread compression process in the banking sector, today’s stable outlook for NIMs provides better grounds for a higher banking franchise, and in turn sustainable profitability in the core banking business.

Both Akbank and Isbank have the best margin mix among the large scale banks, whilst

13

Turkish Banks, 9 November 2005

Garanti is more focused on high-margin TL assets with its strong positioning in SME and retail loans, including credit cards. The banks’ strong performance in achieving healthier NIMs in the banking business can be largely attributable to their public perception of being a safe and sound bank, which lowers their cost of collecting deposits. This of course further strengthens the bank’s franchise value. At this point, Garanti currently seems more advantageous in terms of high yielding margin mix in the lucrative TL lending segments – such as retail and SME loans - compared to its peers (Akbank and Is Bank). With its partnership with GE, the bank could have the opportunity to increase its deposit franchise and in turn achieve optimal NIMs in the near future. As regards the medium-sized banks, TEB will likely be the beneficiary of the new banking landscape with its cautious asset growth strategy and conservative cost management stance. As seen in Chart 12, TEB keeps the cost/income ratio trending downward. According to our model, we believe Finansbank and Denizbank may face difficulties in sustaining the optimal NİM range due to their aggressive growth strategies and higher cost bases.

The key question is; what should the optimal strategy be in order to achieve long-term profitability in the core banking business? Based on our analysis on page 8, operating with a large free capital base is the key factor. The success of Akbank in running at better NIM is due to its strong free capital base, which allows the bank to be more selective in penetrating TRY deposits. This is why Akbank has a strong presence in the lucrative TL market.

In our view, Akbank is in the best position in terms of free equity with the highest interest earning assets/ assets ratio of 91%. Isbank has the potential to increase its free equity base with the sale of its non-core assets. In Q3, it withdrew from the energy sector by selling its share in Petrol Ofisi to Dogan Group and from the iron& steel business by selling its İzmir Demir Celik shares. Partially monetizing the bank’s investments in industrial companies and deploying more free equity to the core banking business will boost its franchise value, yielding further upsides over the next couple of years. As regards Garanti Bank, the bank’s partnership with GE will have a significant effect on its capital structure (as a result of disposal of non-core assets) and franchise value (thanks to the guidance of GE on higher value added products – such as vendor finance, consumer finance, mortgages and cash management) and in turn Garanti’s deposit franchise. The bank may increase its presence in the lucrative TL segment and become less dependent on foreign currency spreads. Thus, we expect further potential upsides in Garanti over the next couple of years, depending on GE’s equity policy and especially its contribution to the bank’s penetration in high margin products. However, considering the current balance sheet structure, catching up with its peers’ deposit franchise appears to take time. As for the medium-scale deposit banks, Finansbank, TEB and Denizbank, free capital to equity ratio shows a robust performance, contributing to these banks’ core banking business profitability.

Chart 8: Free Capital/ Equity

83 78 81 80 65 69 58 59 60 52 52 56 60 46 38 40 28 17 19 12 10 20 0 Akbank Isbank Garantibank Finansbank TEB Denizbank

Source: Company data, YF Research 2004 1H05 2005E

14

Turkish Banks, 9 November 2005

The larger the deposit base, the higher the franchise value – Increasing concentration in the sector. Akbank has the largest deposit base among the private banks. With the freeing of equity by USD750m and growth of the customer portfolio with the increase in cross-sell and CRM activities, the Bank’s deposits grew by 36% in the first half of 2005. Akbank has achieved the fastest deposit growth, exceeding the sector average of 8%. In H1 05, Akbank made up one-third of total deposit growth, whilst 50% of the deposit increase came from the three largest banks, Akbank, Isbank and Garanti, implying the strengthening of sector concentration. The current fundamentals in the banking sector left the equity values of Akbank, Isbank and Garanti more sensitive to their market share growth, particularly in the lucrative TL segments (both deposit and lending business). As for Isbank, the growth in deposits is not as high as for loans, and funding is also provided through foreign borrowing and repo transactions. We expect an increase in deposit growth with the implementation of the 15% withholding tax on marketable securities (T-bills/bonds and stocks) and deposits. The medium-sized banks have not entered reckless competition in the deposit market. This has led to a decline in Finansbank and Denizbank’s deposit growth rates, whilst TEB has increased its deposits by focusing on CRM solutions.

The 15% withholding tax could be positive for the banking sector. With the start of the 15% withholding tax application in 2006, all saving instruments will be subject to a single tax rate and will be treated equally as of 1 January 06. This implementation will have a positive impact on the banking sector, as it will lead to a shift towards deposits. Thus, the new tax regime on financial and capital market gains appears to allow the deposit banks to widen their deposit base, increasing their franchise values, and more importantly could be offsetting potential further declines in net interest margins.

Chart 9: Deposit Growth (%)

60 50 36 40 30 32 30 19 23 22 15 16 18 20 10 10 9 7 6 10 0 1 0 -10 Akbank Isbank Garantibank Finansbank TEB Denizbank -8 2004 1H05 2005E 1H05 Sector Average

Source: Company data, YF Research, BAT data

Loan/ deposit ratio is an indicator of dependency on deposit collection in order to finance the banks’ loan book. As seen in Chart 11, medium-sized banks (Finansbank, TEB and Denizbank) are more sensitive to deposit collection to finance their lending activity, putting upward pressure on the cost of deposits (funding), and in turn leading to margin erosion as larger banks created a market with higher deposit rates, even though the smaller banks did not intend to participate in reckless competition. At this point, Finansbank seems disadvantaged by its high loan/deposit ratio.

15

Turkish Banks, 9 November 2005

Chart 10: Loans/ Deposits Ratio (%)

120 114 114 110 102 100 88 90 90 82 83 74 80 71 70 65 67 70 63 63 61 60 63 60 51 50 40 Akbank Isbank Garantibank Finansbank TEB Denizbank 2004 1H05 2005E 1H05 Sector Average

Source: Company data, YF Research, BAT data

The large banks have entered the cost-cutting process by branch centralization.

The strategy is to utilize branches for marketing activities and operational work. All CRM activities including customer recognition and customer-oriented pricing strategies are followed at the branches, with targets set for each branch. The branches will be subject to rating, which will bring expertise. The branch and personnel increases are not expected to become big issues for the large caps. On the other hand, smaller banks that are trying to grow aggressively could have larger cost pressures. In this process, TEB differentiates from its peers, Finansbank and Denizbank, as its cost/income ratio is on a declining trend, by generating higher core banking business income with smaller branch network. The reason for the higher cost/income ratio for Isbank compared to its peer Akbank is the effect of its large amount of excess general provisions.

Chart 11: Cost/ Income (%)

84 81 80 69 62 62 61 55 57 55 57 58 60 51 52 49 49 44 38 40 33

20 Akbank Isbank Garantibank Finansbank TEB Denizbank

2004 1H05 2005E

Source: Company data, YF Research

The big banks have more potential to increase ROAE on the back of their higher potential to increase leverage and more sustainable margins. Isbank has the strongest potential in ROAE expansion as Isbank is in the process of disposal of its non-core participations (except glass business) and non-core fixed assets, which is planned to be finalized by the end of 2007. We expect the bank’s ROAE to increase sharply and reach 18% by 2007. Moreover, it faces a moderate growth path among its peers, as it has a large amount of excess deposits. Akbank has increased its ROAE to above 20% with the purchase of its founders’ shares. 25% of the dividend distributed last year was

16

Turkish Banks, 9 November 2005

paid to founders, and this is regained through the purchase. Garanti is selling its non-core assets- increasing interest earning assets. This brings ROAE expectation to the 23% to 24% range. As for Finansbank, together with pressure on cost/income with branch expansion, we expect a lower ROAE.

Chart 12: ROAE (%)

40 34 30 28 30 24 26 20 21 20 22 20 21 17 17 20 15 12 14 9 9 10

0 Akbank Isbank Garantibank Finansbank TEB Denizbank

2004 1H05 2005E

Source: Company data, YF Research

17

Turkish Banks, 9 November 2005

Macro Assumptions – Our base case scenario helps Banks

Our base case scenario in our models assumes a slightly slower, but stable growth profile in the global economy, a strengthening of Turkey’s dual IMF-EU anchors and a cautious mood in domestic financial markets. In our base case scenario, the convergence program with the European Union Acquis and structural reform on the fiscal front (which aims to overhaul the tax system and improve the quality and cost-efficiency of public spending) would pave the way for accumulation of physical and human capital by reducing income inequality and high poverty rates, improving distribution of wealth, and increasing the quality of public education, and the judicial and health system. With stronger human and physical capital accumulation, this is highly likely to move Turkey onto a higher economic growth plateau. This would likely result in further global integration, increasingly improved total factor productivity, greater financial sector depth and a stable exchange rate path, and in turn price stability.

To this end, our base case scenario sees ongoing improvement in productivity gains and corporate profits, further contributing to Turkey’s capital formation, and in turn increasing private sector appetite for hiring staff and undertaking fresh investments. As a result, in our base case scenario, we expect GDP to grow at an annual average rate of 6.0% in 2006-2008. More importantly, private sector fixed capital formation may increase significantly, probably rising 10% per year in 2006-2008. With a US$ 432 billion GDP, we expect per capita income to rise to US$ 5,680 in 2008 from US$ 4,172 in 2004. Meanwhile, PPP-adjusted per capita income, which we expect to stabilize at around US$10,000- 10,200 by 2008, is likely to show consistent signs of income convergence towards the EU zone. The major contributor to economic recovery will plausibly be exports, which could have risen to US$ 88 billion by 2008, while sustained domestic demand will boost imports to US$ 147 billion. Given the widening trade deficit, Turkey’s current account balance is likely to reflect a steadily weakening path for the next two years. The appreciation of the TL (in real-terms) and continuing recovery of the manufacturing industry will likely lead the current account deficit-to-GDP ratio to stabilize at around 6.1%. In such a macroeconomic environment, Turkish banking sector assets as a proportion of GDP will no doubt rise to at least 132% of GDP during the convergence process, reaching US$468 billion. The Turkish banking sector’s domestic liabilities as a proportion of GDP, which implies an M3Y-to- GDP ratio, may rise to 57% in 2008 from the low 40s in 2003-2005.

Despite the downside risks to the disinflation process, we expect inflation to continue inching downwards in 2004, ending the year at around 5.8%. We also think that Turkey’s inflation dynamics are sufficient to buffer the disinflation process from the risk of potential cyclical TRY depreciation. Strong deceleration in the underlying inflation rate, together with weakening pass-through effects, may sustain low inflation expectations in the coming periods, and in turn, lower financial intermediation costs in the banking system. Coupled with an expected decline in the average cost of financial intermediation next year, a predictable low inflation environment could improve the allocative functions of the financial system. Improving financial conditions would further boost both capital formation and Turkey’s external competitiveness.

18

Turkish Banks, 9 November 2005

YF Securities Estimates

2003 2004 2005YFf 2006YFf 2007YFf 2008YFf Growth GDP (YTL million)-nominal prices 359,763 430,511 486,962 537,083 600,586 668,622 GDP (US$ billion) 241.1 302.8 362.8 373.5 404.6 432.0 GDP per capita (US$) 3,383 4172 4946 5033 5383 5680 GNP growth rate (%) 5.9 9.9 5.3 4.3 6.2 5.5 GDP growth rate(%) 5.8 8.9 5.6 4.7 6.5 6.0 Population(mn) 71.3 72.6 73.4 74.2 75.2 76.1 Industrial Production Industrial Production (annual-%) 8.7 9.8 5.6 4.1 5.1 5 Capacity Utilization Rate (average-%) 78.7 81.6 81.0 78.5 81.8 81.5 Interest Rates and Inflation Benchmark Bond Rate (end of period) 27.22 22.25 14.15 13.60 12.20 12.00 Benchmark Bond Rate (average) 46.12 24.57 16.20 14.40 14.20 14.00 O/N rate (end of period) 26.00 18.00 13.50 12.00 10.00 10.00 PPI (annual-%) 13.90 13.84 5.50 5.45 5.21 5.00 CPI (annual-%) 18.40 9.32 7.06 5.77 5.45 5.20 Deflator 22.50 9.90 7.07 5.33 5.03 5.03 Foreign Currency Devaluation (USD-%) -15.0 -4.1 1.2 5.6 4.4 4.2 YTL/USD (average) 1.4922 1.4219 1.3421 1.4380 1.4846 1.5476 YTL/USD (end of period) 1.3933 1.3363 1.3637 1.4403 1.5042 1.5681 Balance of Payments (US$ million) Export (f.o.b) 47,253 63,121 72,500 76,131 82,570 88,223 Import (c.i.f) 69,340 97,540 117,250 124,410 136,245 147,009 Trade Balance -22,087 -34,419 -44,750 -48,279 -53,674 -58,786 Current Account Balance -8,037 -15,543 -22,720 -23,710 -25,064 -26,250 Current Account Balance/GNP (%) -3.4 -5.2 -6.3 -6.3 -6.2 -6.1 Total Debt Stock Domestic Debt/GNP(%) 54.5 52.3 52.8 52.0 50.0 47.5 Gross Public Debt/GNP(%) 83.4 77.4 74.4 72.7 71.2 69.0 Net Public Debt Stock/GNP (%) 70.4 63.5 61.0 58.5 55.8 53.5 Consolidated Budget (US$ million) Budget Balance/GNP (%) -11.3 -7.1 -3.5 -3.0 -4.3 -4.0 Consolidated Budget Primary Bal. / GNP(%) 5.2 6.1 6.1 5.0 4.5 4.7 Source : CBT, SIS, Government, YF Securities

Our base-case scenario upgrades the Turkish banking sector In our base case scenario, Turkey’s dual anchors, together with structural reform program, will likely pave the way for further and sustained economic and political reforms, providing a major boost to Turkey’s disinflationary efforts, and in turn help compress debt yields. Thus, strengthening recovery in Turkey’s economic and institutional fundamentals will continue to fuel resident capital repatriation, stimulating the de- dollarization process and thus keeping the TRY strong against hard currencies. With the increased access to international capital markets, commercial banks are likely to provide a major contribution to money creation through their lending activities. Lower financial intermediation costs, together with price stability will improve the allocative functions of the financial system. In the 2006-2008 period, the loans to GDP ratio (a proxy for loan penetration rate) could rise to 37% in 2008 from 20.6% in 2004. We expect the loan stock to increase significantly, rising as much as 33% in real-terms (for the entire 2005-2008 period) to US$159b in 2008 from US$74b in 2004. This indicates that the Turkish banking system would still continue to run at low loan penetration rates, suggesting a sustained diseconomy of scope problem in the banking sector. Strong loan growth will result in healthy net interest income growth, despite lower spreads, while boosting loan-originated fees. Amid financial market stabilization, banks’ sale of mortgages, leasing products and consumer loans will probably grow at higher rates, driven by under-penetration, improved consumer confidence and lower interest rates. We expect consumer loans and credit card lending as a proportion of GDP to stabilize in the 8.5%-9.0% range, slightly up from the expected 8.2% of GDP in 2005.

19

9November 2005

Akbank Initiated

STRONG BUY

Best business mix Akbank has been the best performing banking stock, outperforming the ISE- Trading Data Sector Banks 100 index by 7% since January 2004, mainly due to its solid balance sheet Bloomberg AKBNK.TI and strong positioning in the lucrative TL segments. Akbank also has the Reuters AKBNK.IS largest deposit base, highest free equity and lowest cost/income ratio, which Mkt cap (TRYmn) 16,560 allows it to raise domestic funds at cheaper costs, and thus to achieve Free float (%) 33.65 Shares Outstanding 1,800 profitable TL franchises (currently representing 30% of its business mix). Ave. Daily Vol. (TRYmn) 35.68 ISE-100 (TRY) 33,830

Strong value creation Akbank is clearly the main beneficiary of Turkish banking system Price Data consolidation on the back of (a) high spreads on deposits, (b) strong market 1M 3M 12M share allowing the Bank to generate large cash flows for each TL of new (TRY) deposit and (c) superior equity value entirely coming from the banking ISE-100 33,414 29,925 22,616 Absolute 0.5 1.3 4.1 business. Since Akbank does not have a conglomerate structure, it deploys Absolute (%) 6.4 15.7 79.1 80% of its capital to the core banking business segments, and thus any Relative (%) 5.0 2.4 19.7 additional value generated in the core banking business significantly contributes to the bank’s equity value. More importantly, the Bank’s ability to achieve stronger equity value has improved significantly since buying the Founders’ shares. All in all, we believe that the bank’s business model Current (TRY) Target (TRY) 9.20 11.44 supports continuing earnings and potential upgrades with increasing substitution to the TL business and increasing lending volume.

We expect a 5-year CAGR of 11% in NII and 16% in Key Ratios (%) 2004 2005E 2006E net income NIM 8.3 6.6 5.8 ROAA 3.0 3.5 3.3 An adjustment in personnel costs and costs stemming from branch renovation ROAE 17.1 24.3 27.4 has increased near-term operating costs, which are expected to start declining Cost/Income 43.9 38.1 34.9 in 2006, further triggering profitability. The share of fees and commissions NPL Ratio 1.6 1.9 2.1 Free Equity 82.7 80.5 82.2 among total income is expected to rise to 25% by 2007. Although NIMs are declining, we expect them to stay within the optimal range of 6.0% to 8.5%, thanks to the TL business and loan growth. Ownership Structure (%) Sabancı Holding 34.2 Sabancı Family 23.3 24% upside to our fair value Other 42.5

Our fair value for Akbank is TRY20.6b, as based on our dividend discount model. The bank is also expected to show improvement based on the

2.3xP/BV and 27% ROAE multiples on our 2006 estimates. Price Chart (TRY)

TRY mn FY 2004 FY 2005E FY 2006E FY 2007E 12.00 1.20 Net Interest Income 2,539 2,642 2,959 3,314 10.00 1.00 8.00 0.80 Net fee& comm. income 427 640 928 1,206 Operating Profit 3,452 3,722 4,340 4,987 6.00 0.60 Net Profit 1,021 1,495 1,799 2,108 4.00 0.40 Book Value 6,227 6,075 7,047 8,069 2.00 0.20 - 0.00 Valuation Jul-04 Jul-05 Jan-04 Oct-04 Jan-05 Oct-05 P/E 16.2 11.1 9.2 7.9 Apr-04 Apr-05 P/BV 2.7 2.7 2.3 2.1 EPS 0.6 0.8 1.0 1.2 Share Price (TRY) DPS 0.3 0.5 0.6 0.7 Relative to ISE (RHS) BVPS 3.5 3.4 3.9 4.5

20 Turkish Banks, 9 November 2005

AKBANK VALUATION

TRYmn 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E

Net Earnings 1,495 1,799 2,108 2,463 2,811 3,161 3,550 3,985 4,437 4,938

Dividend to Ordinary S.holders to be paid Mid-next Year 897 1,079 1,265 1,478 1,687 1,896 2,130 2,391 2,662 2,963

Payout Ratio 60% 60% 60% 60% 60% 60% 60% 60% 60% 60%

Cost of Equity 16% 16% 16% 16% 16% 16% 16% 16% 16% 16%

Perpetuity growth rate 9.5%

Discount Coefficient 0.9 0.7 0.6 0.6 0.5 0.4 0.4 0.3 0.3 0.2

NPV of Each Dividend 777 809 821 830 820 799 777 754 727 701

NPV of dividends in the forecast period 7,815

NPV of Perpetuity 12,774

Total NPV 20,588

# of Ordinary Shares 1,800

Fair Price per Share 11.4

Current market cap 16,560

Current price per share 9.20

Upside/Downside (%) 24%

21 Turkish Banks, 9 November 2005

AKBANK FINANCIAL STATEMENTS

TRYmn 2004A 2005E 2006E 2007E 2008E 2009E 2010E

Income Statement

Interest income 4,413 4,721 5,288 5,923 6,633 7,330 8,063

Interest expense (1,874) (2,080) (2,329) (2,609) (2,922) (3,243) (3,584)

Net interest income 2,539 2,642 2,959 3,314 3,711 4,087 4,479

Net fee & commission income 427 640 928 1,206 1,508 1,809 2,081

Dividend income 3 4 4 4 5 5 5

Net Trading Income 329 230 233 235 237 240 242

Gains on Securities Held-for-investment - - 0 0 0 0 -

Other Operating Income 155 207 217 228 239 251 264

TOTAL Operating Income 3,452 3,722 4,340 4,987 5,700 6,391 7,070

Provision for Loan Losses and Other Receivables (-) (193) (347) (468) (608) (760) (912) (1,049)

Other Operating Expenses (-) (1,149) (1,286) (1,351) (1,418) (1,475) (1,519) (1,565)

NET Operating Income 2,111 2,089 2,522 2,960 3,465 3,960 4,456

Income from Investments and Associates 31 46 49 51 54 56 59

Income / (Loss) on Net Monetary Position (646) ------

Income Before Taxation (XII+XIII+XIV) 1,497 2,136 2,570 3,012 3,518 4,016 4,515

Provision for Taxation on Income (-) (476) (641) (771) (903) (1,056) (1,205) (1,355)

Net Income Before Extraordinary Items 1,021 1,495 1,799 2,108 2,463 2,811 3,161

Extraordinary Items ------

Net Income 1,021 1,495 1,799 2,108 2,463 2,811 3,161

22 Turkish Banks, 9 November 2005

TRYmn 2004A 2005E 2006E 2007E 2008E 2009E 2010E

Balance Sheet

Cash 274 670 1,053 1,355 1,447 1,560 1,642

Trading Securities 3,762 6,490 6,303 5,987 6,287 6,601 6,931

Banks 1,291 1,733 2,724 3,503 3,743 4,034 4,247

Money Market Instruments 430 131 206 264 283 305 321

Available-for-sale Securities (net) 11,154 14,895 14,466 13,743 14,430 15,151 15,909

Loans 12,939 20,250 24,664 30,830 35,455 39,000 42,900

Held-to-maturity securities (net) 322 383 372 354 371 390 409

Investments and subsidiaries 393 495 520 546 573 602 632

Reserve Requirements with the CB of Turkey 1,926 2,929 4,604 5,921 6,326 6,818 7,178

Accrued Interest and Income Receivable 1,674 1,845 2,900 3,729 3,985 4,294 4,521

Property and Equipment 660 669 703 738 775 813 854

Intangibles (Net) 25 19 30 39 41 44 47

Other Assets 63 115 180 231 247 267 281

Total Assets 34,913 50,624 58,724 67,239 73,963 79,880 85,871

Customer deposits 19,918 31,893 38,758 46,510 53,486 57,765 62,386

Money Market 2,273 4,390 3,918 2,805 1,252 1,222 1,300

Funds Borrowed 4,845 6,075 7,047 8,456 9,725 10,697 11,232

Marketable Securities Issued (net) ------

Miscellaneous Payables 697 821 732 524 234 228 243

Taxes and Other Duties Payable 67 64 58 41 18 18 19

Accrued Interest and Expenses Payable 271 524 467 335 149 146 155

Provisions 321 459 410 293 131 128 136

Other Payables 294 323 288 206 92 90 96

Shareholders' Equity 6,227 6,075 7,047 8,069 8,876 9,586 10,305

Total Liabilities And Shareholders' Equity 34,913 50,624 58,724 67,239 73,963 79,880 85,871

2004A 2005E 2006E 2007E 2008E 2009E 2010E

Key Ratios

Balance Sheet Ratios

Securities/Assets 44% 43% 36% 30% 29% 28%27%

Loans/Assets 37% 40% 42% 46% 48% 49%50%

Deposits/Assets 57% 63% 66% 67% 72% 72%73%

Loans/deposits 65% 63% 64% 66% 66% 68%69%

Equity/Assets 18% 12% 12% 12% 12% 12%12%

Free Capital/ Equity 83% 81% 82% 84% 84% 85% 85%

Profitability Ratios

ROAA 3.0% 3.5% 3.3% 3.3% 3.5% 3.7% 3.8%

ROAE 17% 24% 27% 28% 29% 30%32%

23 Turkish Banks, 9 November 2005

2004A 2005E 2006E 2007E 2008E 2009E 2010E

Income Structure

NIM 8.3% 6.6% 5.8% 5.7% 5.7% 5.7% 5.8%

Adjusted NIM 5.6% 5.8% 4.9% 4.7% 4.5% 4.5% 4.5%

Interest Spread 7.5% 6.0% 5.5% 5.5% 5.6% 5.7% 5.8%

Cost/Income 44% 38% 35% 32% 30% 28%26%

Effective tax rate 32% 30% 30% 30% 30% 30% 30%

Provisions

NPL/Gross Loans 1.6% 1.9% 2.1% 2.1% 2.1% 2.1% 2.1%

Provisions 100% 100% 100% 100% 100% 100%100%

Growth Rates

Loans 30% 56% 30% 25% 15% 10%10%

Securities Portfolio -5% 43% 5% -5% 5% 5% 5%

Total Assets 4% 45% 16% 15% 10% 8% 8%

Deposits -8% 60% 22% 20% 15% 8%8%

Shareholders' Equity 8% -2% 16% 15% 10% 8% 8%

Net interest income 29% 4% 12% 12% 12% 10% 10%

Net Fee income 90% 50% 45% 30% 25% 20% 15%

Net Trading Income -83% -30% 1% 1% 1% 1% 1%

Net Income -32% 46% 20% 17% 17% 14% 12%

Operating expense -14% 12% 5% 5% 4% 3% 3%

Provisions 29% 80% 35% 30% 25% 20%15%

24 Turkish Banks, 9 November 2005

9November 2005

Isbank Initiated

STRONG BUY

Dominant franchise in TL business and effective Trading Data margin mix Sector Banks Isbank has one of the best banking franchises in the Turkish banking sector, Bloomberg ISCTR.TI Reuters ISCTR.IS with its robust ROE rising to 18%. The bank has a sound business mix, with Mkt cap (TRYmn) 19,689 core banking revenues representing 60% of total revenues. Isbank also has a Free float (%) 28.5 strong deposit franchise in both TL and foreign currency segments, and a Shares Outstanding 1,969 dominant franchise in the credit card segment, which offers satisfactory Ave. Daily Vol. (TRYmn) 69.24 ISE-100 (TRY) 33,830 spread levels. Regarding interest margins, Isbank has a healthier margin mix, such that 55% of its net interest income is being raised by core business Price Data revenues. Besides, coupled with the Bank’s large share of TL business in its 1M 3M 12M margin mix, Isbank has the potential to generate much higher value in the TL (TRY) business for each TL deposit. ISE-100 33,414 29,925 22,616 Absolute 0.8 2.6 4.8 Absolute (%) 8.7 34.2 92.1 Relative (%) 7.4 18.7 28.4 On its way to becoming a pure banking play Isbank is not a pure banking play since a significant portion of the bank’s equity value comes from the conglomerate business. Thus, Isbank, with its Current (TRY) Target (TRY) current conglomerate structure, is not yet capable of securing permanent 10.00 12.07 shareholder value creation. At this point, the bank’s strategy to redesign its business model so as to deploy more capital to its core banking business is very encouraging, as these initiatives will strongly improve the bank’s franchise value for the foreseeable future, and thus create substantial value for its shareholders. Key Ratios (%) 2004 2005E 2006E NIM 7.3 6.9 6.1 ROAA 1.7 2.4 2.7 ROAE 9.1 13.6 16.1 2005 results under pressure due to one off Cost/Income 61.8 55.1 48.4 provisions NPL Ratio 8.3 5.0 4.5 Free Equity 11.8 34.4 50.0 Isbank has registered solid operating activity so far this year, but this was not reflected in the bottom line due to a more conservative approach in provisioning of a) the pension fund deficits b) write-down for Avea, and c) Ownership 100% provision for NPL’s (despite 50% is recoverable). This has caused a Structure (%) lower net income growth compared with the peer group, but is priced into the Isbank Pention Fund 43.4 models. Ataturk's Shares 28.1 Free-Float 28.5

Disposal of non-core assets to enhance ROAE

A key strategy is to exit from non-core assets and raise free cash, which is Price Chart (TRY) projected to be finalized by 2007, with the free equity ratio to rise to 65%. The Bank has already sold its stake in Petrol Ofisi, IDC, and some real estate for 12.00 1.50 a total of USD634m. We estimate that the Bank will sell a total of USD1.2b of 10.00 non-core assets and raise ROAE to 18% in 2007. 8.00 1.00 6.00 4.00 0.50 Recommendation ‘Strong Buy’ 2.00 - 0.00 Our fair value for Isbank is TRY23.7b, a 21% upside as based on our dividend discount model. The stock is expected to trade at 2.1xP/BV and Jul-04 Jul-05 Jan-04 Oct-04 Jan-05 Oct-05 ROAE of 16% on our 2006 estimates. Apr-04 Apr-05

Share Price (TRY) Relative to ISE ( RHS)

25 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

TRY mn FY 2004 FY 2005E FY 2006E FY 2007E Net Interest Income 2,093 2,646 3,193 3,743 Net fee& comm. income 710 958 1,245 1,556 Operating Profit 3,711 4,605 5,574 6,594 Net Profit 635 1,137 1,599 2,104 Book Value 7,640 9,024 10,829 12,453

Valuation P/E 30.2 16.9 12.0 9.1 P/BV 2.5 2.1 1.8 1.5 EPS 0.3 0.6 0.8 1.1 DPS 0.1 0.3 0.5 0.6 BVPS 3.9 4.6 5.5 6.3

ISBANK VALUATION

TRYmn 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E

Net Earnings 1,137 1,599 2,104 2,593 3,025 3,521 4,097 4,755 5,439 6,210

Income from participations (108) (108) (108) (108) (108) (108) (108) (108) (108) (108)

Net Earnings from Bank Operations 1,029 1,492 1,997 2,485 2,917 3,414 3,990 4,648 5,331 6,103

Dividend to Ordinary S.holders to be paid Mid-next Year 682 960 1,263 1,556 1,815 2,113 2,458 2,853 3,263 3,726

Payout Ratio 66% 64% 63% 63% 62% 62% 62% 61% 61% 61%

Cost of Equity 16% 16% 16% 16% 16% 16% 16% 16% 16% 16%

Perpetuity growth rate 8.5%

Discount Coefficient 0.86 0.74 0.64 0.55 0.47 0.41 0.35 0.30 0.26 0.22

NPV of Each Dividend 587 711 805 853 856 858 859 858 844 829

NPV of dividends in the forecast period 8,059

NPV of Perpetuity 11,671

Total NPV 19,731

Fair value of participations 4,027

Total Value 23,757

# of Ordinary Shares 1,969

Fair Price per Share 12.1 Current market cap 19,689

Current price per share 10.00 Upside/Downside (%) 21%

26 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

ISBANK FINANCIAL STATEMENTS

TRYmn 2004A 2005E 2006E 2007E 2008E 2009E 2010E

Income Statement

Interest income 4,493 5,167 5,890 6,656 7,454 8,200 9,020

Interest expense (2,400) (2,520) (2,696) (2,912) (3,145) (3,365) (3,601)

Net interest income 2,093 2,646 3,193 3,743 4,309 4,834 5,419

Net fee & commission income 710 958 1,245 1,556 1,868 2,148 2,470

Dividend income 1 1 1 1 1 1 1

Net Trading Income 494 568 681 817 940 1,081 1,243

Gains on Securities Held-for-investment - - 0 0 0 0 0

Other Operating Income 414 432 453 476 500 525 551

TOTAL Operating Income 3,711 4,605 5,574 6,594 7,618 8,589 9,684

Provision for Loan Losses and Other Receivables (-) (1,069) (1,229) (1,352) (1,487) (1,636) (1,799) (1,979)

Other Operating Expenses (-) (1,549) (1,859) (2,045) (2,208) (2,385) (2,576) (2,782)

NET Operating Income 1,093 1,517 2,177 2,899 3,597 4,214 4,923

Income from Investments and Associates 108 108 108 108 108 108 108

Income / (Loss) on Net Monetary Position (134) ------

Income Before Taxation (XII+XIII+XIV) 1,067 1,624 2,285 3,006 3,704 4,321 5,030

Provision for Taxation on Income (-) (464) (487) (685) (902) (1,111) (1,296) (1,509)

Net Income Before Extraordinary Items 603 1,137 1,599 2,104 2,593 3,025 3,521

Extraordinary Items ------

Net Income 603 1,137 1,599 2,104 2,593 3,025 3,521

27 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

TRYmn 2004A 2005E 2006E 2007E 2008E 2009E 2010E

Balance Sheet

Cash 1,144 2,129 3,486 4,384 5,123 5,603 6,163

Trading Securities 351 541 541 498 557 613 674

Banks 1,080 2,300 3,766 4,736 5,534 6,053 6,658

Money Market Instruments - 1,888 3,093 3,889 4,545 4,971 5,468

Available-for-sale Securities (net) 13,181 15,550 15,550 14,306 16,023 17,625 19,387

Loans 12,452 21,267 26,751 34,962 38,038 41,841 46,026

Held-to-maturity securities (net) 317 316 316 291 326 358 394

Investments and subsidiaries 4,824 4,027 3,527 2,527 2,906 3,254 3,580

Reserve Requirements with the CB of Turkey 1,548 2,644 4,330 5,445 6,363 6,959 7,655

Accrued Interest and Income Receivable 1,269 1,745 1,734 1,734 1,995 2,234 2,457

Property and Equipment 1,916 1,890 1,890 1,890 2,174 2,434 2,678

Intangibles (Net) 0 0 0 0 0 0 0

Other Assets 432 393 644 810 946 1,035 1,138

Total Assets 38,514 54,690 65,627 75,472 84,528 92,981 102,279

Customer deposits 24,320 31,720 39,376 45,283 50,717 55,789 61,367

Money Market 800 3,755 3,785 4,353 4,875 5,363 5,899

Funds Borrowed 3,864 7,110 8,532 9,811 10,989 12,088 13,296

Marketable Securities Issued (net) ------

Miscellaneous Payables 238 358 361 416 465 512 563

Taxes and Other Duties Payable 63 62 63 72 81 89 98

Accrued Interest and Expenses Payable 209 366 369 424 475 523 575

Provisions 992 1,542 1,554 1,787 2,002 2,202 2,422

Other Payables 388 752 758 872 977 1,075 1,182

Shareholders' Equity 7,640 9,024 10,829 12,453 13,947 15,342 16,876

Total Liabilities And Shareholders' Equity 38,514 54,690 65,627 75,472 84,528 92,981 102,279

2004A 2005E 2006E 2007E 2008E 2009E 2010E

Key Ratios

Balance Sheet Ratios

Securities/Assets 36% 30% 25% 20% 20% 20%20%

Loans/Assets 32% 38% 40% 45% 45% 45%45%

Deposits/Assets 63% 58% 60% 60% 60% 60%60%

Loans/deposits 51% 67% 68% 77% 75% 75%75%

Equity/Assets 20% 17% 17% 17% 17% 17%17%

Free Capital/ Equity 12% 34% 50% 65% 64% 63% 63%

Profitability Ratios

ROAA 1.7% 2.4% 2.7% 3.0% 3.2% 3.4% 3.6%

ROAE 9.1% 13.6% 16.1% 18.1% 19.6% 20.7% 21.9%

28 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

2004A 2005E 2006E 2007E 2008E 2009E 2010E

Income Structure

NIM 7.3% 6.9% 6.1% 5.9% 5.9% 6.0% 6.1%

Adjusted NIM 3.4% 3.7% 3.5% 3.6% 3.7% 3.8% 3.9%

Interest Spread 7.7% 7.0% 6.2% 6.0% 6.0% 6.1% 6.3%

Cost/Income 62% 55% 48% 43% 40% 38%36%

Effective tax rate 42% 30% 30% 30% 30% 30% 30%

Provisions

NPL/Gross Loans 8.3% 5.0% 4.5% 4.0% 4.0% 4.0% 4.0%

Provisions 100% 100% 100% 100% 100% 100%100%

Growth Rates

Loans 27% 71% 26% 31% 9% 10%10%

Securities Portfolio 3% 18% 0% -8% 12% 10% 10%

Total Assets 9% 42% 20% 15% 12% 10% 10%

Deposits 9% 30% 24% 15% 12% 10%10%

Shareholders' Equity 20% 18% 20% 15% 12% 10% 10%

Net interest income 68% 26% 21% 17% 15% 12% 12%

Net Fee income 29% 35% 30% 25% 20% 15% 15%

Net Trading Income -52% 15% 20% 20% 15% 15% 15%

Net Income 32% 79% 41% 32% 23% 17% 16%

Operating expense -7% 20% 10% 8% 8% 8% 8%

Provisions 16% 15% 10% 10% 10% 10%10%

29 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

9November 2005

Garanti Bank Initiated

OUTPERFORM

A higher probability for the potential value Trading Data Sector Banks Garanti is more focused on high-margin TL assets with its strong positioning Bloomberg GARAN.TI in SME and retail loans, including credit cards. We believe that with its Reuters GARAN.IS partnership with GE, the bank could potentially boost its banking franchise Mkt cap (TRYmn) 8,736 and in turn achieve higher core banking profitability in the near-future, as it Free float (%) 44 Shares Outstanding 2,100 will deploy more capital to its banking business and reduce its dependency Ave. Daily Vol. (TRYmn) 39.63 on short-term money market funding. Based on Garanti’s deal with GE, the ISE-100 (TRY) 33,830 Bank is to sell USD700m of non-core assets, including the sale of its stake in Tansas within a 3-year period, which should raise the free equity ratio to 72% Price Data by 2007 and significantly improve the bank’s funding mix. The disposal of 1M 3M 12M (TRY) non-core assets could also offer important opportunities to acquire a stronger ISE-100 33,414 29,925 22,616 TL franchise in the foreseeable future. To this end, we attach a higher Absolute 0.1 0.6 2.1 probability to the potential value for Garanti’s shareholders on the back of Absolute (%) 2.0 17.5 98.9 these strategic initiatives, making forthcoming valuations attractive. Relative (%) 0.7 3.9 33.0

A positive feedback loop between market share Current (TRY) Target (TRY) gains and value creation 4.16 4.92

In the era of the bank’s partnership with GE, we expect Garanti to increase its market share, and hence, bolster its presence in the lucrative TL business segment, which should enhance its capacity to charge fees and commissions. Thus, coupled with potential market share gains, Garanti’s new Key Ratios (%) 2004 2005E 2006E NIM 5.9 6.5 6.4 business model could drive additional value to bank equity. More importantly, ROAA 1.7 2.5 2.8 its equity value could fully reflect all additional value created in the core ROAE 15.1 21.0 24.0 banking business. At this point, we believe that normalization of the Cost/Income 69.5 52.5 45.5 macroeconomic landscape will support a positive feedback loop between NPL Ratio 4.0 4.5 4.4 Free Equity 10.4 37.5 53.5 market share gains and value creation, thanks to the bank’s leading position in each service and product, strong expertise in retail and SME markets, cross-border benchmarking, full-scale segmentation and disciplined loan Ownership Structure (%) culture. Dogus Group 55.1 Free-Float 44.9

Best CRM solutions, but inadequate in widening the deposit base Price Chart (TRY) The Bank has opted for enlargement in terms of branch network (the branch number is expected to increase from approx. 400 to 500 by the end of 2006), 6.00 2.00 and a customer-oriented approach is being applied. Best CRM solutions with 1.50 best technology and highly qualified human capital are more settled 4.00 1.00 compared with its competitors. Yet despite all of these, the Bank has not yet 2.00 demonstrated aggressive deposit base growth due its less aggressive pricing 0.50 strategies when compared with its peers. - 0.00

Jul-05 Jul-04 Oct-05 Oct-04 Jan-05 Jan-04 Apr-05 18% upside to our fair value Apr-04 Our fair value for Garanti is TRY10.3b, as based on our dividend discount model. Our recommendation is “Outperform”, although we believe the bank is Shar e Price (TRY) prone to potential upgrades on post-merger GE strategies, which will become Relative to ISE (RHS) clearer over the coming months. The valuation appears attractive at a 2x P/BV and estimated ROAE of 24% on our 2006 estimates.

30 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

TRY mn FY 2004 FY 2005E FY 2006E FY 2007E Net Interest Income 1,288 1,711 2,119 2,410 Net fee& comm. income 555 732 952 1,142 Operating Profit 2,149 2,748 3,374 3,863 Net Profit 451 747 1,041 1,232 Book Value 3,169 3,612 4,334 5,114

Valuation P/E 19.4 11.7 8.4 7.1 P/BV 2.8 2.4 2.0 1.7 EPS 0.2 0.4 0.5 0.6 DPS - - - 0.4 BVPS 1.5 1.7 2.1 2.4

GARANTI BANK VALUATION

TRYmn 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E

Net Earnings 739 1,077 1,273 1,492 1,720 1,978 2,234 2,520 2,838 3,192

Dividend to Ordinary S.holders to be paid Mid-next Year 0 0 764 895 1,032 1,187 1,340 1,512 1,703 1,915

Payout Ratio 0% 0% 60% 60% 60% 60% 60% 60% 60% 60%

Cost of Equity 16% 16% 16% 16% 16% 16% 16% 16% 16% 16%

Perpetuity growth rate 9%

Discount Coefficient 0.86 0.74 0.64 0.55 0.47 0.41 0.35 0.30 0.26 0.22

NPV of Each Dividend 0 0 488 492 489 484 471 457 443 430

NPV of dividends in the forecast period 3,753

NPV of Perpetuity 6,571

Total NPV 10,324

# of Ordinary Shares 2,100

Fair Price per Share 4.92

Current market cap 8,736

Current price per share 4.16

Upside/Downside (%) 18%

31 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

GARANTI BANK FINANCIAL STATEMENTS

TRYmn 2004A 2005E 2006E 2007E 2008E 2009E 2010E

Income Statement

Interest income 3,049 3,384 3,960 4,435 4,967 5,464 6,010

Interest expense (1,761) (1,673) (1,840) (2,024) (2,227) (2,427) (2,646)

Net interest income 1,288 1,711 2,119 2,410 2,740 3,036 3,364

Net fee & commission income 555 732 952 1,142 1,313 1,471 1,648

Dividend income 1 1 1 1 1 1 1

Net Trading Income 163 130 111 100 95 90 85

Gains on Securities Held-for-investment ------

Other Operating Income 143 173 191 210 231 254 279

TOTAL Operating Income 2,149 2,748 3,374 3,863 4,380 4,852 5,378

Provision for Loan Losses and Other Receivables (-) (425) (531) (557) (613) (675) (742) (816)

Other Operating Expenses (-) (1,187) (1,164) (1,280) (1,434) (1,577) (1,656) (1,739)

NET Operating Income 537 1,054 1,536 1,816 2,129 2,455 2,823

Income from Investments and Associates 59 2 2 2 2 2 3

Income / (Loss) on Net Monetary Position (15) ------

Income Before Taxation (XII+XIII+XIV) 581 1,056 1,538 1,819 2,131 2,457 2,826

Provision for Taxation on Income (-) (234) (317) (461) (546) (639) (737) (848)

Net Income Before Extraordinary Items 348 739 1,077 1,273 1,492 1,720 1,978

Extraordinary Items ------

Net Income 348 739 1,077 1,273 1,492 1,720 1,978

32 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

TRYmn 2004A 2005E 2006E 2007E 2008E 2009E 2010E

Balance Sheet

Cash 1,291 1,405 1,815 2,325 3,431 3,823 4,255

Trading Securities 276 210 231 253 246 271 298

Banks 244 771 996 1,277 1,884 2,099 2,336

Money Market Instruments ------

Available-for-sale Securities (net) 5,381 6,888 7,588 8,314 8,090 8,899 9,789

Loans 10,501 15,604 19,951 24,427 27,804 30,584 33,642

Held-to-maturity securities (net) 3,606 2,917 3,214 3,521 3,427 3,769 4,146

Investments and subsidiaries 1,554 1,336 1,236 1,136 1,136 1,136 1,136

Reserve Requirements with the CB of Turkey 1,333 1,836 2,371 3,038 4,483 4,995 5,559

Accrued Interest and Income Receivable 545 639 826 1,058 1,561 1,740 1,936

Property and Equipment 1,264 898 748 598 598 598 598

Intangibles (Net) 21 24 30 39 57 64 71

Other Assets 252 308 397 509 751 837 931

Total Assets 26,268 32,835 39,402 46,494 53,468 58,815 64,697

Customer deposits 17,612 21,014 25,611 31,151 35,824 39,406 43,347

Money Market 974 1,827 2,192 2,587 2,975 3,273 3,600

Funds Borrowed 3,548 4,925 5,516 5,579 6,416 7,058 7,764

Marketable Securities Issued (net) ------

Miscellaneous Payables 71 89 107 127 146 160 176

Taxes and Other Duties Payable 44 44 53 63 72 79 87

Accrued Interest and Expenses Payable 167 312 375 442 509 560 616

Provisions 130 257 308 364 418 460 506

Other Payables 552 754 904 1,067 1,227 1,350 1,485

Shareholders' Equity 3,169 3,612 4,334 5,114 5,882 6,470 7,117

Total Liabilities And Shareholders' Equity 26,268 32,835 39,402 46,494 53,468 58,815 64,697

2004A 2005E 2006E 2007E 2008E 2009E 2010E

Key Ratios

Balance Sheet Ratios

Securities/Assets 35% 31% 28% 26% 22% 22%22%

Loans/Assets 40% 46% 50% 52% 52% 52%52%

Deposits/Assets 67% 64% 65% 67% 67% 67%67%

Loans/deposits 60% 74% 78% 78% 78% 78%78%

Equity/Assets 12% 11% 11% 11% 11% 11%11%

Free Capital/ Equity 10% 38% 54% 65% 70% 72% 75%

Profitability Ratios

ROAA 1.7% 2.5% 2.8% 3.0% 3.0% 3.0% 3.0%

ROAE 15% 21% 24% 23% 23% 23%23%

33 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

2004A 2005E 2006E 2007E 2008E 2009E 2010E

Income Structure

NIM 5.9% 6.5% 6.4% 6.1% 5.9% 5.9% 5.9%

Adjusted NIM 4.2% 4.5% 4.7% 4.5% 4.5% 4.4% 4.5%

Interest Spread 6.6% 7.0% 6.6% 6.2% 6.2% 6.2% 6.2%

Cost/Income 69% 52% 45% 44% 0% 0%0%

Effective tax rate 34% 30% 30% 30% 30% 30% 30%

Provisions

NPL/Gross Loans 4.0% 4.5% 4.4% 4.4% 4.4% 4.4% 4.4%

Provisions 56% 68% 70% 80% 100% 100%100%

Growth Rates

Loans 34% 37% 50% 57% 39% 25%21%

Securities Portfolio -15% 8% 10% 10% -3% 10% 10%

Total Assets 3% 25% 20% 18% 15% 10% 10%

Deposits 7% 19% 22% 22% 15% 10%10%

Shareholders' Equity 14% 14% 20% 18% 15% 10% 10%

Net interest income 1915% 33% 24% 14% 14% 11% 11%

Net Fee income 36% 32% 30% 20% 15% 12% 12%

Net Trading Income -80% -20% -15% -10% -5% -5% -5%

Net Income 31% 64% 46% 18% 17% 15% 15%

Operating expense 20% -2% 10% 12% 10% 5% 5%

Provisions 191% 25% 5% 10% 10% 10%10%

34 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

9November 2005

Finansbank Initiated

NEUTRAL

Impressive growth and substantial value creation Trading Data Finansbank has undergone a structural transformation since the 2001 Sector Banks crisis. Asset size has doubled, with loan size increasing by nearly 4 times Bloomberg FINBN.TI Reuters FINBN.IS since then. It has become the largest bank in terms of presence abroad. Mkt cap (TRYmn) 4,465 The year 2004 was one of massive growth, and the Bank benefited Free float (%) 41 significantly from this robust growth performance in 2005, achieving Shares Outstanding 950 impressive profitability. With the year-to-date surge of 160% in its stock Ave. Daily Vol. (TRYmn) 9.17 ISE-100 (TRY) 33,830 price, the Bank has so far created substantial value for its shareholders.

Price Data 1M 3M 12M The bank approaches its potential (TRY) So far this year, the Bank’s net income has risen sharply with the increase ISE-100 33,414 29,925 22,616 in its core banking revenue as a result of its increased loan portfolio and Absolute 0.0 0.6 3.7 lack of monetary losses. However, we expect the Bank to have a difficult Absolute (%) 0.2 15.5 370.1 Relative (%) -1.0 2.2 214.2 time maintaining cost levels on a similar path to larger banks. Foreign operations, especially in Russia will speed up in 2006, and another subsidiary will have started operating in Ukraine by the end of this year. Current (TRY) Target (TRY) The branch network is growing as well. These together will pressure the 4.70 5.16 cost/income ratio, in our view. The strengthening of cost pressures, existence of diseconomies of scope and high concentration in the banking sector raise question marks over the sustainability of the bank’s core Key Ratios (%) 2004 2005E 2006E business profitability. More importantly, we perceive an inconsistency NIM 7.9 8.8 8.5 between the bank’s deposit franchise and its efforts to expand the branch ROAA 2.5 3.6 3.7 ROAE 19.9 30.5 31.9 distribution network. Cost/Income 61.9 49.3 46.6 NPL Ratio 2.1 2.5 2.5 Free Equity 45.5 57.8 54.4 10% upside to our fair value

Our fair value for Finansbank is TRY 4.9bn, as based on our dividend discount model. The stock is expensive compared to peers, trading at a Ownership Structure (%) Fiba Group 55.68 P/BV of 3.3 and the P/BV is estimated to be above average for 2006 and Other 44.32 2007. Yet, with a high ROAE of 30% we rate Finansbank “neutral”.

Price Chart (TRY)

TRY mn FY 2004 FY 2005E FY 2006E FY 2007E Net Interest Income 531 810 1,020 1,181 Net fee& comm. income 190 275 357 429 6.00 5.00 Operating Profit 763 1,147 1,443 1,680 4.00 Net Profit 192 364 481 560 4.00 3.00 Book Value 1,047 1,340 1,675 2,010 2.00 2.00 1.00 - 0.00 Valuation P/E 23.3 12.3 9.3 8.0 Jul-05 Jul-04 Oct-05 Oct-04 Jan-05 Jan-04 Apr-05 P/BV 4.3 3.3 2.7 2.2 Apr-04 EPS 0.2 0.4 0.5 0.6 DPS - - - 0.4 Share Price (TRY) BVPS 1.1 1.4 1.8 2.1 Relative to ISE (RHS)

35 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

FINANSBANK VALUATION

TRYmn 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E

Net Earnings 364 481 560 641 734 830 927 1,025 1,106 1,193

Income from participations (18) (19) (20) (21) (22) (23) (25) (26) (27) (28)

Net Earnings 345 462 539 620 711 807 903 999 1,079 1,165

Dividend to Ordinary S.holders to be paid Mid-next Year 0 0 336 384 440 498 556 615 664 716

Payout Ratio 0% 0% 62% 62% 62% 62% 62% 62% 62% 61%

Cost of Equity 16% 16% 16% 16% 16% 16% 16% 16% 16% 16%

Perpetuity growth rate 9%

Discount Coefficient 0.9 0.7 0.6 0.6 0.5 0.4 0.4 0.3 0.3 0.2

NPV of Each Dividend 0 0 216 213 210 205 198 189 176 164

NPV of dividends in the forecast period 1,570

NPV of Perpetuity 2,580

Total NPV 4,150

Fair value of participations 751

Total Value 4,901 # of Ordinary Shares 950 Fair Price per Share 5.16 Current market cap 4,465 Current price per share 4.70 Upside/Downside (%) 10%

36 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

FINANSBANK FINANCIAL STATEMENTS

TRYmn 2004A 2005E 2006E 2007E 2008E 2009E 2010E

Income Statement

Interest income 1,043 1,503 1,878 2,160 2,376 2,614 2,875

Interest expense (513) (692) (859) (979) (1,057) (1,142) (1,233)

Net interest income 531 810 1,020 1,181 1,319 1,472 1,642

Net fee & commission income 190 275 357 429 515 618 710

Dividend income ------

Net Trading Income (16) (16) (16) (16) (16) (16) (16)

Gains on Securities Held-for-investment ------

Other Operating Income 59 78 82 86 90 95 100

TOTAL Operating Income 763 1,147 1,443 1,680 1,908 2,168 2,436

Provision for Loan Losses and Other Receivables (-) (72) (159) (191) (229) (275) (330) (379)

Other Operating Expenses (-) (380) (487) (584) (672) (739) (813) (894)

NET Operating Income 310 501 668 779 894 1,026 1,163

Income from Investments and Associates 21 18 19 20 21 22 23

Income / (Loss) on Net Monetary Position (77) ------

Income Before Taxation (XII+XIII+XIV) 255 520 687 800 915 1,048 1,186

Provision for Taxation on Income (-) (63) (156) (206) (240) (275) (314) (356)

Net Income Before Extraordinary Items 192 364 481 560 641 734 830

Extraordinary Items ------

Net Income 192 364 481 560 641 734 830

37 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

TRYmn 2004A 2005E 2006E 2007E 2008E 2009E 2010E

Balance Sheet

Cash 81 103 139 167 179 208 237

Trading Securities ------

Banks 654 738 995 1,194 1,280 1,485 1,693

Money Market Instruments ------

Available-for-sale Securities (net) 1,286 1,748 1,456 1,748 2,062 2,392 2,727

Loans 5,191 7,527 9,903 11,884 14,435 16,745 19,089

Held-to-maturity securities (net) ------

Investments and subsidiaries 363 351 473 568 609 706 805

Reserve Requirements with the CB of Turkey 568 597 805 966 1,036 1,202 1,370

Accrued Interest and Income Receivable 146 200 269 323 346 402 458

Property and Equipment 190 202 272 326 350 406 463

Intangibles (Net) 18 13 18 21 23 26 30

Other Assets 135 173 233 280 300 348 397

Total Assets 8,630 11,651 14,563 17,476 20,622 23,921 27,270

Customer deposits 5,092 6,619 8,738 10,835 13,404 15,549 17,726

Money Market 193 99 70 85 71 83 94

Funds Borrowed 1,415 2,972 3,641 4,019 4,331 5,023 5,727

Marketable Securities Issued (net) ------

Miscellaneous Payables 177 111 78 94 79 92 105

Taxes and Other Duties Payable 22 16 11 13 11 13 15

Accrued Interest and Expenses Payable 130 128 91 109 92 106 121

Provisions 172 99 70 85 71 83 94

Other Payables 383 266 189 226 191 221 252

Shareholders' Equity 1,047 1,340 1,675 2,010 2,371 2,751 3,136

Total Liabilities And Shareholders' Equity 8,630 11,651 14,563 17,476 20,622 23,921 27,270

2004A 2005E 2006E 2007E 2008E 2009E 2010E

Key Ratios

Balance Sheet Ratios

Securities/Assets 15% 15% 10% 10% 10% 10% 10%

Loans/Assets 60% 65% 68% 68% 70% 70% 70%

Deposits/Assets 59% 57% 60% 62% 65% 65% 65%

Loans/deposits 102% 114% 113% 110% 108% 108% 108%

Equity/Assets 12% 12% 12% 12% 12% 12% 12%

Free Capital/ Equity 46% 58% 54% 54% 59% 59% 59%

Profitability Ratios

ROAA 2.5% 3.6% 3.7% 3.5% 3.4% 3.3% 3.2%

ROAE 20% 31% 32% 30% 29% 29% 28%

38 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

2004A 2005E 2006E 2007E 2008E 2009E 2010E

Income Structure

NIM 7.9% 8.8% 8.5% 8.1% 7.5% 7.2% 7.0%

Adjusted NIM 5.6% 7.0% 6.9% 6.5% 6.0% 5.5% 5.3%

Interest Spread 7.2% 8.0% 8.0% 7.8% 7.3% 6.9% 6.7%

Cost/Income 61.9% 49.3% 46.6% 46.3% 45.2% 44.2% 43.5%

Effective tax rate 25% 30% 30% 30% 30% 30% 30%

Provisions

NPL/Gross Loans 2.1% 2.5% 2.5% 2.5% 2.5% 2.5% 2.5%

Provisions 100% 100% 100% 100% 100% 100% 100%

Growth Rates

Loans 73% 45% 32% 20% 21% 16% 14%

Securities Portfolio -33% 36% -17% 20% 18% 16% 14%

Total Assets 32% 35% 25% 20% 18% 16% 14%

Deposits 23% 30% 32% 24% 24% 16% 14%

Shareholders' Equity 20% 28% 25% 20% 18% 16% 14%

Net interest income 64% 53% 26% 16% 12% 12% 12%

Net Fee income 67% 45% 30% 20% 20% 20% 15%

Net Trading Income n.m. n.m. n.m. n.m. n.m. n.m. n.m.

Net Income 10% 90% 32% 16% 14% 14% 13%

Operating expense -11% 28% 20% 15% 10% 10% 10%

Provisions -32% 120% 20% 20% 20% 20% 15%

39 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

9November 2005

TEB Initiated

STRONG BUY

Trading Data TEB offers solid funding mix and robust growth Sector Banks Bloomberg TEBNK.TI prospects Reuters TEBNK.IS With the current balance sheet structure and growth strategy in core banking Mkt cap (TRYmn) 1,023 business, the bank is using the right policies, consistent with the arithmetic of Free float (%) 15.8 Shares Outstanding 58 the Turkish banking industry. Following the sale of a 50% of stake to BNP Ave. Daily Vol. (TRYmn) 2.56 Paribas, TEB has so far pursued a strong growth strategy. The Bank has ISE-100 (TRY) 33,830 achieved a healthier asset growth in 2005 with its declining dependency on expensive TL funding. TL deposits make up only 24.9% of its funding mix. Price Data Only a small fraction of its total funding (7.5%) comes from money market 1M 3M 12M (TRY) funds thanks to the Bank’s excess liquidity. In our view, TEB offers better ISE-100 33,414 29,925 22,616 growth prospects than its peers, as it secures a more stable funding platform Absolute -2.7 3.7 10.9 to finance solid growth. Thus, we see the stock predominantly as a value Absolute (%) -13.2 26.4 158.7 play. Relative (%) -14.3 11.8 73.0

Large dependency on FX funding is the key risk Current (TRY) Target (TRY) Despite its smaller branch network, TEB achieved these impressive returns 17.70 23.35 by avoiding costly TL deposits and concentrating its efforts on cheaper foreign currency financing. The bank’s foreign currency funding currently comprises 70% of the bank’s total funding mix. Thus, TEB is heavily dependent on foreign currency funding, and is highly sensitive to foreign Key Ratios (%) 2004 2005E 2006E currency margins, hampering the development of TL franchises. In our view, NIM 5.8 6.0 5.7 the bank needs to strengthen its presence in the lucrative TL market to ROAA 1.0 2.1 1.9 compete effectively with its peers, Finansbank and Denizbank. ROAE 8.8 20.0 19.5 Cost/Income 80.6 55.0 60.0 NPL Ratio 1.3 1.5 1.4 Free Equity 51.7 58.8 60.1 A Strong Profitable Franchise

In the TL business, the Bank sees the SME sector and retail segment as an opportunity to achieve higher net interest margins. TEB has introduced an Ownership Structure (%) integrated package of accounting system and banking operations for BNP Paribas 42.1 corporate customers, and is now implementing the same system for SME Çolakoğlu Group 42.1 customers. Furthermore, a support center has been established where Free-Float 15.8 consultancy is provided to SMEs meeting their administrative needs, such as

HR, taxation, insurance, etc. This service is expected to generate value exceeding its cost, thereby strengthening customer loyalty. Price Chart (TRY)

Strongest upside potential Our fair value for TEB is TRY 1.35bn, as based on our dividend discount 25.00 4.00 model. The stock trades at P/BV of 1.9x according to 2006 estimates and 20.00 3.00 15.00 2.00 should raise its ROAE to 20%. TEB improved its profitability through growth 10.00 of its earning assets. This will be reinforced through its deal with BNP 5.00 1.00 - 0.00 Paribas, through which TEB will mainly benefit from the Bank’s retail market expertise. Jul-04 Jul-05 Jan-04 Oct-04 Jan-05 Oct-05 Apr-04 Apr-05 Share Price (TRY) Relative to ISE (RHS)

40 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

TRY mn FY 2004 FY 2005E FY 2006E FY 2007E Net Interest Income 181 228 270 313 Net fee& comm. income 30 40 49 59 Operating Profit 260 317 378 439 Net Profit 34 86 100 116 Book Value 394 458 550 633

Valuation P/E 30.3 11.9 10.3 8.8 P/BV 2.6 2.2 1.9 1.6 EPS 0.6 1.5 1.7 2.0 DPS 0.2 0.4 1.0 1.2 BVPS 6.8 7.9 9.5 10.9

TEB VALUATION

TRYmn 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E

Net Earnings 85 98 114 134 155 172 189 207 224 242

Income from participations (8) (8) (9) (9) (10) (10) (11) (11) (12) (12)

Net Earnings 77 90 106 125 145 162 178 196 212 229

Dividend to Ordinary S.holders to be paid Mid-next Year 26 59 69 80 93 103 113 124 134 145

Payout Ratio 33% 66% 65% 64% 64% 64% 64% 63% 63% 63%

Cost of Equity 14% 14% 14% 14% 14% 14% 14% 14% 14% 14%

Perpetuity growth rate 8%

Discount Coefficient 0.880 0.774 0.681 0.600 0.528 0.464 0.409 0.360 0.316 0.278

NPV of Each Dividend 22 46 47 48 49 48 46 45 42 40

NPV of dividends in the forecast period 434

NPV of Perpetuity 774

Total NPV 1,208

Fair value of participations 142

Total Value 1,350

# of Ordinary Shares 57.80

Fair Price per Share 23.35

Current market cap 1,023

Current price per share 17.7 Upside/Downside (%) 32%

41 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

TEB FINANCIAL STATEMENTS

TRYmn 2004A 2005E 2006E 2007E 2008E 2009E 2010E

Income Statement

Interest income 408 474 535 599 659 725 790

Interest expense (227) (245) (265) (286) (306) (328) (351)

Net interest income 181 228 270 313 353 397 440

Net fee & commission income 30 40 49 59 68 78 90

Dividend income ------

Net Trading Income 32 40 48 55 63 71 78

Gains on Securities Held-for-investment - - 0 0 0 0 0

Other Operating Income 17 10 11 12 13 15 16

TOTAL Operating Income 260 317 378 439 498 561 624

Provision for Loan Losses and Other Receivables (-) (25) (30) (37) (44) (51) (59) (67)

Other Operating Expenses (-) (164) (174) (209) (241) (265) (291) (320)

NET Operating Income 71 114 132 155 182 212 236

Income from Investments and Associates 7 8 8 9 9 10 10

Income / (Loss) on Net Monetary Position (31) ------

Income Before Taxation (XII+XIII+XIV) 47 122 140 163 191 221 246

Provision for Taxation on Income (-) (20) (36) (42) (49) (57) (66) (74)

Net Income Before Extraordinary Items 27 85 98 114 134 155 172

Extraordinary Items 0 ------

Net Income 27 85 98 114 134 155 172

42 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

TRYmn 2004A 2005E 2006E 2007E 2008E 2009E 2010E

Balance Sheet

Cash 856 669 777 893 983 1,081 1,189

Trading Securities 10 85 102 118 130 143 157

Banks 171 278 323 371 408 449 494

Money Market Instruments 95 ------

Available-for-sale Securities (net) 333 528 633 728 801 881 969

Loans 1,585 2,476 3,026 3,480 3,827 4,210 4,631

Held-to-maturity securities (net) 65 75 89 103 113 124 137

Investments and subsidiaries 146 142 165 190 209 230 253

Reserve Requirements with the CB of Turkey 190 209 242 279 307 337 371

Accrued Interest and Income Receivable 44 45 53 61 67 74 81

Property and Equipment 40 44 51 58 64 71 78

Intangibles (Net) 3 3 3 4 4 5 5

Other Assets 27 31 36 42 46 51 56

Total Assets 3,566 4,584 5,501 6,326 6,959 7,655 8,420

Customer deposits 2,260 2,980 3,576 4,112 4,523 4,976 5,473

Money Market 159 232 279 291 320 352 388

Funds Borrowed 577 642 770 949 1,044 1,148 1,263

Marketable Securities Issued (net) ------

Miscellaneous Payables 39 40 48 50 55 61 67

Taxes and Other Duties Payable 10 11 13 14 15 16 18

Accrued Interest and Expenses Payable 29 36 43 45 49 54 60

Provisions 32 37 45 47 51 57 62

Other Payables 67 148 178 186 205 225 248

Shareholders' Equity 394 458 550 633 696 765 842

Total Liabilities And Shareholders' Equity 3,566 4,584 5,501 6,326 6,959 7,655 8,420

2004A 2005E 2006E 2007E 2008E 2009E 2010E

Key Ratios

Balance Sheet Ratios

Securities/Assets 11% 15% 15% 15% 15% 15%15%

Loans/Assets 44% 54% 55% 55% 55% 55%55%

Deposits/Assets 63% 65% 65% 65% 65% 65%65%

Loans/deposits 70% 83% 85% 85% 85% 85%85%

Equity/Assets 11% 10% 10% 10% 10% 10%10%

Free Capital/ Equity 52% 59% 60% 60% 60% 60% 60%

Profitability Ratios

ROAA 1.0% 2.1% 1.9% 1.9% 2.0% 2.1% 2.1%

ROAE 9% 20% 19% 19% 20% 21%21%

43 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

2004A 2005E 2006E 2007E 2008E 2009E 2010E

Income Structure

NIM 5.8% 6.0% 5.7% 5.6% 5.6% 5.8% 5.8%

Adjusted NIM 4.3% 5.2% 4.9% 4.8% 4.8% 4.9% 4.9%

Interest Spread 9.1% 8.4% 7.0% 6.9% 6.9% 7.1% 7.1%

Cost/Income 81% 55% 60% 58% 56% 54% 52%

Effective tax rate 37% 30% 30% 30% 30% 30% 30%

Provisions

NPL/Gross Loans 1.3% 1.5% 1.4% 1.4% 1.4% 1.4% 1.4%

Provisions 54% 55% 55% 55% 55% 55% 55%

Growth Rates

Loans 19% 56% 22% 15% 10% 10% 10%

Securities Portfolio 216% 69% 20% 15% 10% 10% 10%

Total Assets 10% 29% 20% 15% 10% 10% 10%

Deposits 0% 32% 20% 15% 10% 10% 10%

Shareholders' Equity 6% 16% 20% 15% 10% 10% 10%

Net interest income 16% 26% 18% 16% 13% 13% 11%

Net Fee income 42% 32% 25% 20% 15% 15% 15%

Net Trading Income -47% 25% 20% 15% 15% 12% 10%

Net Income -42% 152% 16% 16% 17% 16% 11%

Operating expense 16% 6% 20% 15% 10% 10% 10%

Provisions 233% 20% 25% 20% 15% 15% 15%

44 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

9November 2005

Denizbank Initiated

OUTPERFORM

A value story Trading Data Denizbank has to date improved its business mix, with core banking Sector Banks Bloomberg DENIZ.TI revenues reaching 60% of total banking revenues. The Bank has also Reuters DENIZ.IS achieved a respectable margin in TRY market. Since the well-executed Mkt cap (TRYmn) 2,529 acquisition strategy in 2002-2003 (During this period, Denizbank acquired Free float (%) 25 branches, deposits and loan portfolios of failed banks under the SDIF), Shares Outstanding 316 Ave. Daily Vol. (TRYmn) 7.62 Denizbank has registered substantial asset growth. Moreover, the Bank’s ISE-100 (TRY) 33,830 efforts to acquire branches and new business franchises at home and aboard have paved the way to generating strong returns from its core banking Price Data business. All in all, we believe that the current stock price fully reflects the 1M 3M 12M strength of its franchise. (TRY) ISE-100 33,414 29,925 22,616 Absolute 0.5 2.1 5.3 An important player in niche markets Absolute (%) 6.7 34.5 192.6 Relative (%) 5.4 18.9 95.6 Denizbank is becoming an important player in niche markets. The Bank acquired agricultural business know-how through acquisition of Tarisbank. It targets becoming a leader in the agricultural segment following Ziraat Bank Current (TRY) Target (TRY) 8.00 9.00 (Turkey’s largest public bank), especially in the Aegean Region. Agricultural reform is expected to boost productivity and access to export markets. This is a profitable market for the banks because the spread of agricultural loans to SMEs is higher than that of consumer loans. Project finance loans in maritime, tourism and health sectors are also in the Bank’s target portfolio. Key Ratios (%) 2004 2005E 2006E NIM 6.2 6.3 5.9 ROAA 2.0 2.6 2.8 A risky way to seek profits ROAE 17.0 21.3 24.8 Cost/Income 84.3 58.3 54.2 Denizbank is sending a strong message to the investment community of the NPL Ratio 4.2 3.0 3.0 group’s commitment to aggressive growth. We are now concerned about this Free Equity 59.6 69.3 70.7 strategy, as the Bank’s rapid growth rate could pressure its ability to maintain banking profitability in an environment of diseconomies of scope and high concentration. Ownership Structure (%) Zorlu Holding 75 Free-Float 25 13% upside to our fair value

Our fair value for Denizbank is TRY2.8b, as based on our dividend discount model. The stock trades at a P/BV of 2.1 and ROAE of 22%, based on our estimates for 2006. Denizbank has significant room for growth, as its recently Price Chart (TRY) expanded branch network matures. The Bank sold its Zorlu Enerji shares in H105, decreasing its share to 41%. The plan is to dispose off its non-core assets by the end of 2008, increasing its free equity ratio to 73%, and thus 10.00 2.50 improving TL franchises. 8.00 2.00 6.00 1.50 4.00 1.00 2.00 0.50 - -

Oct-04 Oct-05 Dec-04 Feb-05 Apr-05 Jun-05 Aug-05 Share Price (TRY) Relative to ISE (RHS)

45 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

TRY mn FY 2004 FY 2005E FY 2006E FY 2007E Net Interest Income 342 447 542 627 Net fee& comm. income 61 98 138 186 Operating Profit 481 646 790 934 Net Profit 123 203 278 350 Book Value 855 1,046 1,199 1,362

Valuation P/E 20.6 12.5 9.1 7.2 P/BV 3.0 2.4 2.1 1.9 EPS 0.4 0.6 0.9 1.1 DPS - - - 1.1 BVPS 2.7 3.3 3.8 4.3

DENIZBANK VALUATION

TRYmn 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E

Net Earnings 203 278 350 423 500 550 603 662 741 828

Income from participations (18) (19) (20) (21) (22) (23) (25) (26) (27) (28)

Net Earnings from Bank Operations 184 259 330 401 478 526 579 637 714 800

Dividend to Ordinary S.holders to be paid Mid-next Year 0 0 210 254 300 330 362 397 444 497

Payout Ratio 0% 0% 64% 63% 63% 63% 63% 62% 62% 62%

Cost of Equity 16% 16% 16% 16% 16% 16% 16% 16% 16% 16%

Perpetuity growth rate 9%

Discount Coefficient 0.86 0.74 0.64 0.55 0.47 0.40 0.35 0.30 0.26 0.22

NPV of Each Dividend 0 0 134 139 141 133 126 119 114 110

NPV of dividends in the forecast period 1,014

NPV of Perpetuity 1,636

Total NPV 2,651

Fair value of participations 195

Total Value 2,846

# of Ordinary Shares 316

Fair Price per Share 9.0

Current market cap 2,529

Current price per share 8 Upside/Downside (%) 13%

46 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

DENIZBANK FINANCIAL STATEMENTS

TRYmn 2004A 2005E 2006E 2007E 2008E 2009E 2010E

Income Statement

Interest income 756 907 1,043 1,169 1,309 1,440 1,555

Interest expense (414) (460) (501) (541) (579) (620) (657)

Net interest income 342 447 542 627 730 820 898

Net fee & commission income 61 98 138 186 232 290 334

Dividend income ------

Net Trading Income (9) 19 21 23 25 28 31

Gains on Securities Held-for-investment - - 0 0 0 0 0

Other Operating Income 88 81 89 98 108 118 130

TOTAL Operating Income 481 646 790 934 1,095 1,256 1,393

Provision for Loan Losses and Other Receivables (-) (83) (67) (73) (81) (87) (94) (102)

Other Operating Expenses (-) (294) (338) (388) (446) (513) (575) (644)

NET Operating Income 104 241 328 407 494 587 647

Income from Investments and Associates 91 18 19 20 21 22 23

Income / (Loss) on Net Monetary Position (50) ------

Income Before Taxation (XII+XIII+XIV) 145 260 347 427 515 610 670

Provision for Taxation on Income (-) (23) (57) (69) (77) (93) (110) (121)

Net Income Before Extraordinary Items 123 203 278 350 423 500 550

Extraordinary Items ------

Net Income 123 203 278 350 423 500 550

47 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

TRYmn 2004A 2005E 2006E 2007E 2008E 2009E 2010E

Balance Sheet

Cash 385 276 302 315 378 434 478

Trading Securities 237 283 361 430 516 593 653

Banks 1,337 1,225 1,339 1,395 1,674 1,925 2,117

Money Market Instruments 93 20 22 23 27 31 34

Available-for-sale Securities (net) 1,128 1,469 1,875 2,232 2,679 3,081 3,389

Loans 2,629 4,533 5,993 8,172 9,806 11,277 12,405

Held-to-maturity securities (net) 36 41 52 62 74 85 94

Investments and subsidiaries 219 195 214 222 267 307 338

Reserve Requirements with the CB of Turkey 294 266 290 302 363 417 459

Accrued Interest and Income Receivable 114 126 138 144 172 198 218

Property and Equipment 114 113 124 129 155 178 196

Intangibles (Net) 12 13 14 14 17 20 22

Other Assets 107 158 172 180 216 248 273

Total Assets 6,705 8,716 10,896 13,619 16,343 18,795 20,674

Customer deposits 4,160 5,056 6,537 8,853 10,623 12,217 13,438

Money Market 260 267 292 261 313 360 396

Funds Borrowed 1,026 1,918 2,397 2,724 3,269 3,759 4,135

Marketable Securities Issued (net) ------

Miscellaneous Payables 157 161 176 157 189 217 239

Taxes and Other Duties Payable 18 10 11 10 12 14 15

Accrued Interest and Expenses Payable 61 77 84 75 90 103 114

Provisions 80 81 89 79 95 109 120

Other Payables 89 101 110 99 118 136 150

Shareholders' Equity 855 1,046 1,199 1,362 1,634 1,879 2,067

Total Liabilities And Shareholders' Equity 6,705 8,716 10,896 13,619 16,343 18,795 20,674

2004A 2005E 2006E 2007E 2008E 2009E 2010E

Key Ratios

Balance Sheet Ratios

Securities/Assets 21% 21% 21% 20% 20% 20%20%

Loans/Assets 39% 52% 55% 60% 60% 60%60%

Deposits/Assets 62% 58% 60% 65% 65% 65%65%

Loans/deposits 63% 90% 92% 92% 92% 92%92%

Equity/Assets 13% 12% 11% 10% 10% 10%10%

Free Capital/ Equity 60% 69% 71% 73% 73% 73% 73%

Profitability Ratios

ROAA 2.0% 2.6% 2.8% 2.9% 2.8% 2.8% 2.8%

ROAE 17% 21% 25% 27% 28% 28%28%

48 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

2004A 2005E 2006E 2007E 2008E 2009E 2010E

Income Structure

NIM 6.2% 6.3% 5.9% 5.4% 5.1% 4.9% 4.8%

Adjusted NIM 3.2% 5.3% 5.9% 5.5% 8.3% 5.6% 5.3%

Interest Spread 6.3% 6.1% 5.7% 5.2% 5.0% 4.8% 4.7%

Cost/Income 84% 58% 54% 52% 51% 49% 50%

Effective tax rate 16% 22% 20% 18% 18% 18% 18%

Provisions

NPL/Gross Loans 4.2% 3.0% 3.0% 3.0% 0.0% 0.0% 0.0%

Provisions 89% 87% 89% 90% 100% 100% 100%

Growth Rates

Loans 52% 72% 32% 36% 20% 15% 10%

Securities Portfolio -25% 28% 28% 19% 20% 15% 10%

Total Assets 24% 30% 25% 25% 20% 15% 10%

Deposits 18% 22% 29% 35% 20% 15% 10%

Shareholders' Equity 45% 22% 15% 14% 20% 15% 10%

Net interest income 122% 31% 21% 16% 16% 12% 10%

Net Fee income 16% 60% 40% 35% 25% 25% 15%

Net Trading Income n.m. -300% 10% 10% 10% 10% 10%

Net Income 14% 65% 37% 26% 21% 18% 10%

Operating expense 41% 15% 15% 15% 15% 12% 12%

Provisions 60% -20% 10% 10% 8% 8% 8%

49 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

YF Securities: Stock Rating Definitions YF Rating Definition* Investment Horizon Strong Buy Stock return is > 20% 1-12 months Outperform Stock return ranges between 10 and 20% 1-12 months Neutral Stock trades near fair value and return is between 1-12 months -10% and 10% depending on the degree of market volatility

Underperform Stock trades 10-20% > than fair value estimate 1-12 months Sell Stock trades 20% > than fair value estimate 1-12 months

Trading Buy Stock return is > 10%: This is based on technical 1-2 months analysis, supported by fundamentals and potential catalyst Trading Sell Stock return is -10%: This is based on technical 1-2 months analysis, supported by fundamentals and potential catalyst *Return assumption is based on the USD and over the one-year risk-free rate

50 TurkishTurkish Banks, Banks, 9 Novembe 9 November 2005r 2005

Yatırım Finansman Securities Nispetiye Caddesi Akmerkez E-3 Blok Kat:4 Etiler / İstanbul TURKEY

Phone: +90 (212) 317 69 00 Fax: +90 (212) 317 69 32 [email protected]

Although the information in this document has been compiled from various sources which are believed to be reliable, we cannot guarantee their accuracy or adequacy and cannot be held responsible for any omissions, errors or dates that are subject to change without notice. This document is not intended as an offer, invitation or solicitation to buy or sell securities. Yatırım Finansman (YF) Securities Inc., its clients and/or employees may have a position in the securities discussed and may be involved in the provision of investment banking activities and other services for the companies mentioned in this report. This report is strictly submitted to selected recipients only. This report cannot be reproduced, distributed or published in whole or in part without the prior written permission of Yatırım Finansman (YF) Securities Inc.

Murat Tanrıöver Assistant General Manager [email protected] +90 (212) 317 68 05

Institutional Sales and Trading Emre Balkeser Head of Sales Trading [email protected] +90 (212) 317 69 40 Nezihi Abay Director, Institutional Sales [email protected] +90 (212) 317 69 45

Research Ali Kerim Akkoyunlu Head of Equity Research [email protected] +90 (212) 317 69 33 Sertan Kargın Chief Economist [email protected] +90 (212) 317 69 37 Ebru Eroğlu Senior Analyst [email protected] +90 (212) 317 69 35 Aslı Sipahi Senior Analyst [email protected] +90 (212) 317 69 34 Didem Özatalar Senior Analyst [email protected] +90 (212) 317 69 36

Corporate Finance M. Tanju Uygurçetin Head of Corporate Finance [email protected] +90 (212) 317 68 11 F. Çiğdem Yalçınkaya Assistant Manager [email protected] +90 (212) 317 68 60 Pervin Bakankuş Senior Associate [email protected] +90 (212) 317 68 70 Elif Sükan Associate [email protected] +90 (212) 317 68 63

51